Exchange-Traded Exchange: Merc IPO Due Thursday

Everyone loves backing a trailblazer, especially if it turns into a successful venture.

And this week investors get a chance to jump aboard a Wall Street trailblazer, as the Chicago Mercantile Exchange, the nation's largest market for trading futures contracts, becomes the first U.S. exchange to sell shares to the public. The Merc's much-anticipated $153 million initial public offering is expected to price late Thursday at around $32.50 a share.

The Merc offers something that most IPOs lacked during the latter stages of the bull market: a profitable company with strong year-over-year revenue growth. This year the Merc is on a pace to generate more profits than the much larger Nasdaq Stock Market, which has been mulling its own IPO for several years now.

Cheap or Dear?

Yet there's reason to believe that the expected asking price for Merc shares might be a little rich when it begins trading on the New York Stock Exchange under the symbol CME.

At $32.50 each, Merc's stock will open trading at price/earnings valuation of 14, based on the exchange's 2001 earnings of $68.3 million, or $2.33 a share. The exchange, which is selling a 15% stake to the public, will boast a market capitalization of roughly $1 billion.

That might sound like a reasonable valuation, considering that shares of Citigroup(C Quote), the nation's largest financial services firm, trade at a multiple 15 times 2001 earnings. A mid- to high-teens P/E is not uncommon for financial services firms.

Merc IPO Scorecard
Ticker	CME
Expected IPO price	$32.50 a share
Estimated IPO value	$153 million
Total Shares sold to public	4.75 million
Shares sold by exchange	3 million
Shares sold by exchange insiders	1.75 million
Company IPO proceeds	$89 million
Tangible book value	$12.20 a share
Trailing P/E	14
Source: Merc IPO filing

And the Merc's valuation looks especially good when compared with that of Instinet(INET Quote), the big electronic trading platform that may be the closest thing in the U.S. to a publicly traded exchange. Instinet's stock trades at a trailing 2001 P/E of 25, even though the stock has fallen 56% this year and the company has reported three straight quarterly losses this year.

Whither Growth?

But while the Merc is on a lot sounder financial footing than Instinet, its valuation could look a bit frothy if the days of fast-paced growth at the 104-year-old exchange are over.

Indeed, to some degree, the past two years have been a bit of a Nasdaq-like bubble for the Merc. Last year, net revenues at the exchange rose 70% to $387.2 million. And for the first nine months of this year, revenue was running 18% ahead of last year's pace.

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