CME Group Summary: Volume is Up in an Excellent Quarter

Updated from 10/23/2007 8:39 a.m. EDT with earnings review

An excellent third quarter was reported by Chicago Mercantile Group (CME - commentary - Cramer's Take) this morning, with the only fly in the ointment being a cautious statement on fourth-quarter volumes for October month to date being up just 14% year over year.

CME Group reported the first full combined quarter of operations since the contentious Chicago Board of Trade merger was resolved in July, and volume grew 49% year over year (which we already knew) with E-mini leading the way at +83% year over year, while the "average rate per contract" or RPC came in at 62 cents, or about where we predicted in our preview. The 62 cents figure was a 3% decline sequentially.

CME clearly benefited from the capital market disruptions this summer as capital fled risk and gravitated to Treasuries and Eurodollars and the money markets became very volatile.

Operating expenses grew just 7% year over year, thus, vs. revenue growth, CME saw operating expense leverage this quarter.

The operating margin (pro-forma) was 64% -- the highest operating profit margin ever.

While most questions on the conference call were devoted to the two agreements announced Tuesday night around the Korean contract (KOSPI 200), my guess is that earnings estimates for CME's fourth quarter will get lowered on the lower volume being experienced in the fourth quarter. With October volume up just 12% to 14% year over year, vs. the 49% volume growth in the third quarter, the combined exchange may have to lean a little heavier on merger expenses during the fourth quarter.

Really, there were no issues in this call, as far as we could tell, and the integration of the BOT is on pace and schedule.

According to an early note out of Credit Suisse on the quarter, CME quarter to date is showing negative declines in ag and short-term interest rate futures to the tune of 15% and 11% year over year. With the Fed scheduled to meet next week on Oct. 31 and uncertainty over whether the FOMC will move 25 or 50 basis points, the short-tem interest rate complex could see higher volume as we approach Oct. 31 and into the December meeting.

The trading action in CME was positive today, and the volume traded for the stock was a definite plus. This is the best volume up day in quite some time and it confirms CME's technical breakout above $610.

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At the time of publication, Gilmartin was long CME, although positions may change at any time.

Brian Gilmartin, CFA, founded Trinity Asset Management (TAM) in 1995, where he is currently a portfolio manager. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gilmartin appreciates your feedback; click here to send him an email.