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Morningstar | CME Group Sees Slower Trading as Market Volatility Declines in 3Q

In the third quarter, wide-moat CME Group came in close to our expectations, despite revenue declining 14.7% from the previous quarter. During the period, CME saw easing volatility which weighed on trading volumes. Total revenue was $904.2 million, growing 1.5% from the previous year, after producing growth of 19.3% and 14.6% in each of the first two quarters. In our view, CME was unlikely to continue growing at the torrid pace of the first few quarters. That said, we still believe it will generate sales growth of at least 12% for the full year. In addition, markets in the fourth quarter have gotten off to a volatile start, suggesting that the third quarter's slower growth will be short-lived. For the fourth quarter, CME Group earned $1.45 in adjusted EPS, representing growth of nearly 22%. For now, we're maintaining our fair value estimate of $140 per share, which is approximately 21 times our 2019 earnings estimate. We continue to believe that CME Group is a great company, with a price that more than reflects that. Currently, the market values CME at more than 28 times trailing adjusted earnings.

For the third quarter, CME Group’s average daily volume fell 0.8% from last year’s third quarter, largely because of a decline in energy contracts. This doesn’t greatly concern us, since it was primarily driven by lower volatility and not competition. As expected, CME Group continues to increase trading in interest-rate and equity products, with growth that's likely to persist through the fourth quarter. Management continues to stress the importance of foreign exchange products. In fact, analysts and management mentioned "FX" 15 times on the call--exactly as many times as equities was mentioned, despite equities being a much larger product. Only CME Group’s interest-rate products were discussed more. With the inclusion of NEX, CME Group appears determined to grow this franchise, and we expect foreign exchange to continue being an area of focus and investment.

Finally, a big contributor to CME Group’s sales growth came from data, which increased 14% from the previous year. We’ll remind investors that CME Group’s exchange peers are meeting at an SEC roundtable to discuss issues related to data pricing. Unlike the New York Stock Exchange and Nasdaq, CME Group’s data fees aren’t regulated by the Commodity Futures Trading Commission. So CME Group does not need to ask permission to increase rates on data. Given this, we anticipate that CME Group will have significant pricing power on data and that it will account for an increasing share of the exchange’s revenue.