CME Group Price Estimate Lowered
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- We have updated our analysis of
CME Group
(CME) - Get Report
and
revised our price estimate for the company's stock to $285
, about 8% below our previous price estimate and about 4% below its current market price. The company recently reported its fourth quarter and full year 2011 results which were slightly below our expectations.
CME's revenue in 2011 increased by about 9.2%, with a corresponding increase in clearing and transaction fees and information services revenue despite a tough fourth quarter in which its average daily volume declined to 11.7 million from 12 million in the fourth quarter of 2010. CME is the largest futures exchange in the U.S. and competes with
Nasdaq OMX
,
NYSE Euronext
(NYX)
and
Intercontinental Exchange
(ICE) - Get Report
.
See our full analysis of CME Group
.
Trading in interest rate contracts accounts for about a fifth of the Trefis price estimate for CME Group's stock. The average daily volume of interest rate contracts was around 7 million in 2007 before the 2008 to 2009 credit crisis, which resulted in reduced corporate debt issuance, reduced mortgage issuance and refinancing activity, and a slowdown in U.S. Treasury cash market trading.
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As a result, the ADV of interest rate contracts dropped to about 4.3 million in 2009. In 2010, CME witnessed a nearly 30% increase in ADV due to improved economic conditions and market participants' need to hedge interest rate risks. In 2011, it again increased by almost 10% as the company introduced new products both at the short and long end of the interest rate curve.
Going forward, although we expect the growth in ADV of interest rate contracts to continue during our forecast period, we believe the growth rate will cool down to the 5% to 10% range as competitors such as
NYSE Euronext
have launched interest rate derivative contracts to tap into the growing market. Also the
Federal Reserve's
policy to keep interest rates near zero will further hurt growth in ADV. Our revised forecast for CME reflects this slowing growth.
Various cost-cutting initiatives at firms that use CME's market data and information services have put additional pressure on the company to maintain a double-digit growth rate in market data revenues. CME Group, however, has plans to combine its Dow Jones index services with S&P index services, which will help it strengthen its position in market data services.
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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
