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CME Group Surges 40% in a Year: What's Driving the Stock?

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That CME Group Inc. (CME - Free Report) stock is favored by investors, is corroborated by its agreeable share price movement. The stock has soared 41.6% in a year, outperforming its industry's increase of 29.5% and the S&P 500 index’s rally of 15.2%. With a market capitalization of $54.5 billion, average volumes of shares traded in the last three months were 1.7 million.



 

 

Reasons Behind the Rally

The company delivered a positive earnings surprise in the last four quarters with an average beat of 1.86%.

CME Group has been witnessing impressive top-line growth, driven by higher clearing and transaction fees plus access and communication fees. Average daily volume (ADV) expanded at a CAGR of 13% over the last 45 years and increased nearly 30% year over year in the first quarter of 2018 to an all-time high of 22.2 million contracts, backed by higher volumes across all the six product lines.

Fundamental growth remains a huge booster for the company’s improving operating leverage.  Growing futures products in the emerging markets, non-transaction related opportunities and OTC offerings will likely continue to contribute modestly to top-line growth in the coming years. Its options business too gained traction.

Return on equity is a profitability measure, identifying how the company can effectively utilize its shareholders’ fund. The company’s ROE expanded 80 basis points to 8.5% at first-quarter 2018 end over the level at 2017 end.

CME Group’s modest liquidity supports healthy capital deployment via dividend payouts, thereby adding to the company’s financial flexibility as well as investor confidence. The company disburses five dividends per year with the fifth being variable, s based on excess cash flow in that year.

Lower tax rate on the back of an overhaul in tax policy, which slashed the rate to 21% from 35%, will lend an additional boost to the bottom line.

CME Group continuously banks on strategic initiatives to accelerate growth. Shutting down its European operations will result in annual savings between $10 million and $12 million, which is likely to impact 2018 in a major way. The same will also free up over $150 million in capital. Also, the company plans to exit credit default swap clearing business by mid-2018 in order to focus on over-the-counter clearing services on interest rate swaps and foreign exchange.The Zacks Consensus Estimate for current-year earnings and revenues reflect a year-over-year improvement of 42.4% and 13.5%, respectively. While the consensus mark for 2019 represents a respective 2.9% and a 3.1% year-over-year increase for both bottom and the top line.

CME Group carries a Zacks Rank #2 (Buy). With optimism surrounding the stock’s healthy performance, the Zacks Consensus Estimate for 2018 and 2019 has been revised 4.5% and 2.3% upward, respectively, in the last 60 days.

Other Stocks to Consider

Investors interested in the finance sector can also check out other top-ranked stocks like Associated Banc-Corp (ASB - Free Report) , Employers Holdings Inc. (EIG - Free Report) and Evercore Inc. (EVR - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Associated Banc-Corp provides various banking and nonbanking products to individuals and businesses, primarily in Wisconsin, Illinois and Minnesota. It came up with an average four-quarter beat of 10.9%.

Employers Holdings operates in the commercial property and casualty insurance industry, primarily in the United States. It pulled off an average four-quarter positive earnings surprise of 24.2%.

Evercore is an independent investment banking advisory firm in the United States, Europe, Latin America and internationally. It delivered an average four-quarter beat of 24.15%.

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