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On Aug 14, 2013, we upgraded derivative exchange – CME Group Inc. (CME - Analyst Report) to Outperform based on its improved growth momentum, which augurs sustained long-term growth.

Why the Upgrade?

CME Group has witnessed some moderation since its second-quarter 2013 results on Aug 1. Both operating earnings of 93 cents per share and total revenue of $816.1 million topped the Zacks Consensus Estimate of 90 cents and $806 million, respectively, during the second-quarter.

Both earnings and revenues exceeded the year-ago results by 25.7% and 2.5%, respectively. Overall, CME Group delivered positive earnings surprises in all of the last 4 quarters with an average beat of 2.4%.

A surge of 15% in average daily volume along with higher clearing and transaction fees (accounting for about 85% of the total revenue)boosted results, partially offset by lower average rate per contract. Further, a 5.6% decline in operating expenses helped operating margin rebound to its historical highs of above 60% to 62.2% from 59.0% in the year-ago quarter.

Following the release of the second-quarter results, the Zacks Consensus Estimate for 2013 and 2014 remained intact at $3.17 and $3.67 a share, respectively, in the last 7 days. Meanwhile, the current estimates reflect 4.8% year over year growth in 2013 and 15.7% upsurge in 2014. With the Zacks Consensus Estimates for both 2013 and 2014 remaining steady, the company now has a Zacks Rank #3 (Hold).

What is the cause for the strong positive bias on the company? The sustained results in the first half of 2013 have instilled market confidence in the company. This is also reflected by the recent upgrade in outlook to stable from negative by S&P Ratings.

CME Group has the potential to reach new heights once the market stabilizes with its low-risk debt profile, improved operating cash flow and low capital expenditure. Moreover, the company’s diversified product portfolio and strategic alliances bode well for improving operating leverage.

Other Financial Stocks That Warrant a Look

While CME Group shows no clear directional pressure in the near term, other outperformers of the financial sector including MarketAxess Holdings Inc. (MKTX - Snapshot Report), Fleetcor Tech Inc. (FLT - Snapshot Report) and Gain Capital Holdings Inc. (GCAP - Snapshot Report) carrying a Zacks Rank #1 (Strong Buy) appear impressive.

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