On May 9, we upgraded derivative exchange - CME Group
Inc. ( CME
) to Neutral based on some improvement in volumes and strict
expense control in the first-quarter of 2013. However, top line
continued to remain weak.
Why the Upgrade?
Estimates for CME Group have witnessed a marginal decline since
its first-quarter 2013 results on May 2. The company's
first-quarter earnings of 73 cents a share were at par with the
Zacks Consensus Estimate, while total revenue of $718.6 million
topped the Zacks Consensus Estimate of $714 million.
Nonetheless, both earnings and revenues lagged the year-ago
results by 8.8% and 7.2%, respectively. Overall, CME Group
delivered positive earnings surprises in all of the last 4 quarters
with an average beat of 5%.
While average daily volume inched up 1% year over year, total
operating expenses declined 3.2% and non-operating expenses were
flat. However, clearing and transaction fees, accounting for about
83% of the total revenue, decreased 4.5% year over year, whereas
market data and information services decelerated 29.2%. A higher
tax rate also marred the bottom line.
Following the release of the first-quarter results, the Zacks
Consensus Estimate for 2013 dipped 0.6% to $3.13 per share. The
Zacks Consensus Estimate for 2014 also inched down 0.8% to $3.62
per share. With the Zacks Consensus Estimates for both 2013 and
2014 going only marginally down, the company now has a Zacks Rank
What is the cause for the strong positive bias on the company?
While the top line is facing challenges from the macroeconomic
volatility and intense competitiveness and will recover at its
pace, CME Group is initiating a disciplined expense management.
Total expenses are further projected to be below 5% for 2013.
However, low trading activity, currency and interest rate
fluctuations as well as lack of any growth catalyst further raise a
wary outlook on the operating leverage in the upcoming quarters.
Amid a frail operating environment, CME Group also remains exposed
to intense competition.
Though the current scenario appears bleak, CME Group's efforts
to promote, expand and cross-sell its core exchange-traded business
through strategic alliances, meaningful acquisitions and newer
product initiatives along with its global presence should generate
decent growth in the long run
Other Financial Stocks That Warrant a Look
While CME Group shows no clear directional pressure in the near
term, other outperformers of the financial sector including
Axis Capital Holders Ltd. ( AXS ), Fleetcor
Tech Inc. ( FLT ) and Piper
Jaffray Cos. ( PJC ) carrying a Zacks
Rank #1 (Strong Buy) appear impressive.AXIS CAP HLDGS (AXS): Free Stock Analysis
ReportCME GROUP INC (CME): Free Stock Analysis ReportFLEETCOR TECH (FLT): Free Stock Analysis ReportPIPER JAFFRAY (PJC): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment