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CME Group Gains 26% in a Year: Will the Rally Continue?

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Shares of CME Group Inc. (CME - Free Report) have rallied 26.1% in a year, outperforming its industry’s increase of 16.3% and in contrast to the Zacks S&P 500 composite index’s decline of 7.4%. With a market capitalization of $66.4 billion, average volume of shares traded in the last three months were 2.2 million.


Reasons Behind the Rally

The company has a stellar record of surpassing earnings expectation in the last 10 quarters, reflecting operational excellence.

Riding on strength of its product portfolio, CME Group has been reporting solid average daily volumes. Higher volumes at CME Group were driven by solid operating leverage. Increasing electronic trading volume adds scalability and hence leverage to CME Group’s operating model.

In October 2017, the company shut down London-based derivatives exchange and clearing house, CME Europe and CME Clearing Europe. This shutdown is expected to result in annual savings between $10 million and $12 million and free up more than $150 million in capital, thus benefiting 2018 results to a great extent.

Further, the company acquired London-based NEX Group plc. in November 2018 to be a cross-border trading powerhouse.

Also, to focus on over-the-counter clearing services on interest rate swaps and foreign exchange, the company decided to exit credit default swap clearing business, freeing up $650 million as clearing member capital.

The company has been improving its return on equity over the last few quarters. Return on equity is a profitability measure to gauge whether a company is effectively utilizing its shareholders’ money. The company’s ROE expanded 130 basis points year over year to 9.2%.

Can the Bull Run Continue?

CME Group is the largest futures exchange in the world in terms of trading volume and notional value traded. The company has about 90% market share of the global futures trading and clearing services. Also, the company is focused on expanding futures products in emerging markets, non-transaction related opportunities and OTC offerings. Also, management anticipates organic market data revenue growth of 5-6% over the next few years.

The company estimates $200 million in run-rate cost synergies annually by the end of 2021 from NEX Group buyout.

Banking on solid capital and liquidity position, the company pays five dividends each year. The fifth payout is variable based on excess cash flow in the year. Its dividend currently yields 1.5%, better than the industry average of 1.4%, making it an attractive pick for yield-seeking investors.

Per our proven model, the company is expected to deliver a positive surprise in the fourth quarter of 2018 as it has a Zacks Rank #2 (Buy) and an Earnings ESP of +0.87%.

The Zacks Consensus Estimate for 2019 earnings per share projects an increase of 8.7% on 12.2% increase in revenues. The expected long-term earnings growth rate is 11.2%, better than the industry average of 9.4%. The consensus mark for 2019 has also moved up 2.1% in the past 60 days.

Other Stocks to Consider

Investors interested in finance sector can also check out stocks like Intercontinental Exchange Inc. (ICE - Free Report) , eHealth, Inc. (EHTH - Free Report) and MetLife, Inc. (MET - Free Report) , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Intercontinental Exchange operates regulated exchanges, clearing houses, and listings venues for financial and commodity markets in the United States, the United Kingdom, Continental Europe, Asia, Israel, and Canada. It delivered positive earnings surprise of 6.25% in the last reported quarter.

eHealth provides private online health insurance exchange services to individuals, families, and small businesses in the United States and China. It pulled off positive earnings surprise of 50.00% in the last reported quarter.

MetLife engages in the insurance, annuities, employee benefits, and asset management businesses. The company delivered positive earnings surprise of 10.4% in the last reported quarter.

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