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On Feb 27, we downgraded derivative exchange CME Group Inc. (CME - Analyst Report) to Underperform based on its weak top-line growth over the last several quarters.

Why the Downgrade?

Estimates for CME Group have witnessed a steady decline since its fourth-quarter 2012 results on Feb 5. The company’s fourth quarter earnings of 63 cents a share were at par with the Zacks Consensus Estimate, while total revenue of $660.9 million missed the Zacks Consensus Estimate. Nonetheless, both earnings and revenue lagged the year-ago results by 11.3% and 10.3%, respectively.

Following the release of fourth quarter results, the Zacks Consensus Estimate for 2013 has gone down 2.8% to $3.15 per share. The Zacks Consensus Estimate for 2014 also slid 2.2% to $3.61 per share. With the Zacks Consensus Estimates for both 2013 and 2014 going down, the company now has a Zacks Rank #5 (Strong Sell).

Cause for Concern

CME Group has been consistently generating low trading volumes across asset classes and substantially reduced clearing-transaction fees, which have been constricting top-line growth.

Low trading activity, currency and interest rate fluctuations as well as a lack of any growth catalyst further raise a wary outlook on the operating leverage in the upcoming quarters. The gradual clearance of regulatory clouds also indicates higher capital expenditure on infrastructure modifications.

The ongoing consolidation in the industry has raised caution over the sustainability factor of the sturdy groups and poses an uphill battle for companies trying to gain market share. Amid a frail operating environment, CME Group also remains exposed to intense competition.

The recently proposed merger of NYSE Euronext Inc. and IntercontinentalExchange Inc. (ICE - Analyst Report) – both Zacks Rank #3 (Hold) stocks – is liable to snip off CME Group’s market share upon successful completion.

Other Financial Stocks That Warrant a Look

While we prefer to avoid CME Group until we see some improvement in its performance, Moody’s Corp. (MCO - Analyst Report), carrying a Zacks Rank #1 (Strong Buy) appears impressive.

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