On Apr 2, we issued an updated research report on
CME Group Inc.
). While we remain bullish on the company's organic growth
initiatives, headwinds related to economic and interest rate
volatility, immense competition and regulations continue to mar
the desired upside in the stock.
Meanwhile, this Zacks Rank #3 (Hold) stock delivered positive
earnings surprises in 2 of the last 4 quarters with an average
beat of 0.5%. The company's fourth-quarter earnings also missed
the Zacks Consensus Estimate by 4.5%, although it beat the
year-ago quarter number by a penny.
CME Group's diversified product portfolio is significantly
exposed to extreme interest rate volatility, firm government
regulations and limited credit availability. These factors not
only hamper steady growth in volumes of the derivative market but
also implicate higher expenses, as reflected by deteriorated
operating margins in 2013, well below the historical average of
higher than 60%. Poor renewals in co-location services also
dampened the top line in 2013. In addition, CME Group is facing
steep competition from the changing industry dynamics that affect
pricing, volumes and market share.
Light at the end of tunnel
Although 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, newer product initiatives along with its global
presence should generate decent growth in the long run. Going
ahead, the upcoming launch of derivatives exchange in London
along with the launch of Euro-denominated deliverable IRS Futures
(Euro DSF) contracts in Apr 2014 should help boost momentum.
Improved fundamentals and prudent capital management also
supported operating cash flow growth of 5% in 2013 after a
decline of 9% in 2012. Additionally, modest liquidity supports
healthy capital deployment via dividend pay-outs. Along with the
recent 4% dividend hike, the company's annual variable dividend
was worth more than $872 million in 2013, significantly higher
than about $199 million that was paid for the first time in 2012.
Including the regular dividends, a total of about $2.7 billion
was paid in dividends since the beginning of 2012, thereby adding
to the company's financial flexibility and investor
Overall, a balanced risk-reward relationship in the near term
has led to very insignificant estimate revisions for 2014 and
2015. As a result, the Zacks Consensus Estimate for 2014 and 2015
are pegged at $3.59 and $4.11 per share, down a penny each,
respectively, in the last 30 days.
However, the Most Accurate estimate for CME Group's 2014 and
2015 earnings stands at $3.65 and $4.15 a share, resulting in an
of +1.7% and +1.0%, respectively.
Key Picks in the Sector
Some better-ranked stocks in the financial sector include
MarketAxess Holdings Inc.
Portfolio Recovery Associates Inc.
General Finance Corp.
). All the stocks bear a Zacks Rank #2 (Buy).
CME GROUP INC (CME): Free Stock Analysis
GENERAL FINANCE (GFN): Free Stock Analysis
MARKETAXESS HLD (MKTX): Free Stock Analysis
PORTFOLIO RCVRY (PRAA): Free Stock Analysis
To read this article on Zacks.com click here.