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CME Group, Inc. (CME)


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We are downgrading our recommendation on CME Group, Inc. (CME) to Underperform based on its first quarter earnings that lagged the year-over-year results, although it came in line with the Zacks Consensus Estimate. Lower-than-expected volumes, clearing and transaction fees and higher operating, non-operating and tax expenses deteriorated the top line and operating margin.

However, average rate per contract improved marginally. Although excess cash paves the way for capital deployment, debt obligations stands at a cautious level, positing ample financial risk. Additionally, interest rate volatility and intensely rising competition pose operational risks.

Our six-month target price of $237.00 per share equates to about 14.4x our earnings estimate for 2012. Combined with the annual dividend of $8.92 per share, this target price implies an expected negative total return of 7.4% over that period, which is consistent with our Underperform recommendation on the shares.

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