EUR 850.00 For Business Accounts Only

Morningstar | CME Group's 2Q Growth Is Data-Driven

Wide-moat CME Group finished the second quarter in line with our expectations, as the exchange’s trading volumes cooled from the first quarter’s exceptional volatility. Though CME Group’s revenue decreased 4.5% from the previous quarter, they are still 14.6% greater than the previous year as the VIX is still higher than it was the previous year. In addition, CME Group’s market data and information services grew to $114 million, a nearly 20% increase from the previous quarter, while growing 18.4% from the previous year. During the call, management said this was “primarily driven by a screen fee increase, which went into effect in April.” It would appear to us that CME Group which hasn’t pursued growth in data as aggressively as other exchanges, has joined the party by raising data prices. Given CME Group's market data revenue barely grew in the previous two years, we suspect that the exchange provider has more room to raise prices than Intercontinental Exchange and Nasdaq, which have already been aggressively increasing data prices for a while. We will be maintaining our 2018 forecast for revenue growth of 12% and GAAP earnings per share of $6.37.

During the call, management frequently remarked on its growth in Asia. Year to date, Asian average daily volume was 897,000 contracts, 35% higher than it was in 2017. However, despite Asia’s impressive growth its average daily volume is still only approximately a quarter of the size of CME’s European trading volumes. That said, European average daily volume has grown by 18%. In comparison, CME’s total average daily volume was 18.7 million. Asia would account for less than 5% of total trading volumes. Nevertheless, we think Asia could offer CME Group an avenue for growth as margins on nonmember Asian customers are higher than existing member customers receiving discounts for volume.

Finally, management did remark that the threat of tariffs is driving some trading volume, specifically saying that much of this trading activity is coming from non-U.S. participants. For the start of July, trading activity has declined by 5% while management said, “during this period three of our product areas have actually grown while the other three are down.” We suspect that CME Group’s commodity and agricultural products are the ones benefiting given the price uncertainty of these commodities. Given the rising uncertainty of regulation and potential for the declaration of a trade war, we think volatility will remain higher than it was in 2017. Though July trading volumes may disappoint we think it’s possible, if not likely, they rebound as markets digest the increasingly unpredictable geopolitical environment.