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Morningstar | Macro Risks Will Support CME's Near-Term Earnings, While NEX Provides Long-Term Benefits

CME Group had strong results in the first quarter of 2019 as it became the company's third highest trading volume quarter. The company reported net income of $497 million, or $1.39 per diluted share, on $1.18 billion of revenue in the first quarter. Overall, volumes remained high in interest rate products, as there was a lot of uncertainty entering 2019 regarding increases in short-term interest rates and the shape of the yield curve. Equity derivative volumes also remained relatively high in the first quarter. That said, average daily volumes decreased 16% from the previous year and 11% sequentially, as those two quarters had more volatile swings in the equity markets and also corresponded with changing interest rate expectations. We don't expect to make a material change to our $145 fair value estimate for wide-moat CME Group.

We don't anticipate volatility subsiding anytime soon and believe that CME Group can continue to report strong earnings. Many of the headline risks to other financial sector firms are positive to CME Group in that they will increase volatility and trading volumes. Uncertainty over the shape of the interest rate yield curve for rate derivatives, declining equity markets for equity derivatives, and even trade wars for commodity derivatives can all be positive to the company's trading volumes.

Beyond the near-term support from market volatility on trading volumes, the company's acquisition of NEX will add to earnings and further strengthen CME Group's competitive position for years to come. The company is currently guiding to run-rate synergies of $50 million by the end of 2019. We also believe that there are real revenue synergies and competitive advantage gains from combining the cash fixed income and foreign exchange platforms of NEX with CME Group's derivative products.