To The Moon

I am sharing a “hidden” gem that is neither a bank, semiconductor, energy or technology, none of the “hot & sizzling” sectors of the moment.

The $CME Group Inc(CME)$ has just reported its Q3 2024 earnings.

And it is not bad at all. (see below)

Key Q3 2024 Earnings.

Trailing 12-month (TTM) period

• Revenue: US$1.58 billion (up +19% YoY from 3Q 2023) and in line with analyst estimates. (see above)

• Earnings per share (EPS): US$2.54 (up +23.3% YoY from US$2.06, 3Q 2023) but missed analyst estimates by 1.0%.

• Profit margin: 58% (up from 56% in 3Q 2023). Increase in margin was driven by higher revenue.

• Net income: US$901.3 million (up +21.67% from $740.8 million, 3Q 2023).

Past Earnings.

• Looking at its past 5 years performances, earnings have grown at +10.3% per year.

Earnings Outlook.

• Looking ahead, revenue is forecast to grow +3.7% p.a. on average during the next 3 years.

• It is still a commendable growth rate.

• Compared to Capital Markets industry (eg. stock market, bond market etc..), that is forecasted to grow at 6.0%, the risk is higher also comparatively speaking.

Risk Analysis

(1) Dividend of 4.3% is not that well covered by free cash flows (FCF).

• Stable dividend: CME's dividend payments have been volatile in the past 10 years.

• Growing dividend: CME's dividend payments have increased over the past 10 years.

** Note : US market has undergone several upheavals in the past 10 years.

These events (see below) affect businesses and in returns dividends’ yields in the process:

• Covid-19 recession, February 2020 to April 2020.

• 2018 Q4 Correction, December 2018 where the S&P 500 index fell by -20%.

• 2011 Debt Ceiling crisis, August 2011 to October 2011 where the S&P 500 index felll by -19%.

(2) Insider’s Trading.

• During the past 3 months or more, there were more insider sellers than buyers. (see above)

• Less than 3 months, even when the number of buyer and seller matches, the volume sold is more than volume purchased. (see above)

My thots: I don’t dwell too much on this factor as a criterion when assessing CME.

This is because even CEOs of IT giants have sold far more shares than CME’s insiders. (see below)

• $NVIDIA Corp(NVDA)$ - Jensen Huang sold $713 million worth of Nvidia shares between 14 Jun 2024 and 13 Sep 2024, as part of pre-arranged trading plan submitted in advance.

• $Amazon.com(AMZN)$ - Jeff Bezos sold $13.5 billion worth of Amazon shares in February 2024 and July 2024, as part of pre-arranged trading plan submitted in advanced.

• $Meta Platforms, Inc.(META)$, Mark Zuckerberg sold $8.8 million worth of Meta Platform shares on 23 Aug 2024, through Chan Zucker Initiative Foundation and Chan Zuckerberg Initiative Advocacy.

Dividend Yield vs Market.

CME's dividend of 4.34% is higher than the bottom 25% of dividend payers in the US market running at 1.46%. The difference is +2.88%.

When compared to high dividend yield, CME's 4.34% is low than to the top 25% of dividend payers in the US market, coming in at 4.45%. The difference being a negligible -0.11%.

Dividend History : 2024 & 2023.

CME Group Inc. declared a first-quarter dividend of $1.15 per share for 2024.

This is a +5% increase from the previous level of $1.10 per share.

Additionally, CME Group also declared an annual variable dividend of $5.25 per share payable on 18 Jan 2024.

The total dividend yield for 2023 was 5.0% based on the average closing stock price. (see above)

When comparing CME Group's dividend to its peers, it's important to consider the dividend yield and payout ratio.

• CME Group's dividend yield and payout ratio are relatively higher compared to its peers.

• It indicates a more generous return to shareholders and a higher proportion of earnings being distributed as dividends.

P/E versus Peers

CME Group's P/E ratio of 23.8 is lower compared to its peers, indicating it might be (a) relatively undervalued or (b) perceived as less growth-oriented.

Nasdaq, Moody's, and $Intercontinental Exchange(ICE)$ all have higher P/E ratios, suggesting higher growth expectations or premium valuations from investors. (see above)

MSCI has a P/E ratio closer to CME Group but still higher.

Forward Price Target.

Target price is less than 20% higher than the current share price.

My viewpoints: (mine only).

CME Group offers a diverse range of products across various asset classes and operates the world's largest futures exchange with an effective monopoly in several crucial products like E-mini S&P 500 futures. .

Its business model :

• Centers around facilitating efficient trading and risk management for a broad spectrum of market participants, from institutional investors to individual traders.

• Is uniquely defensive as it profits from trading volume rather than asset prices, benefiting from both market volatility and stability.

This robust network effect, coupled with its strong brand reputation and technological advancements, positions CME Group as a resilient and profitable company.

This network effect, combined with high regulatory barriers to entry and significant switching costs for users, protects CME's market position.

Given the enduring need for hedging risks and speculating on future market trends, CME's business model offers long-term stability and growth potential, making it an attractive investment option for those seeking exposure to the financial markets.

Just out on Tue, 29 Oct 2024 - CME future just got a tad “brighter” with the latest 's acquisition of an Futures Commission Merchant (FCM) license. (see above)

It is a strategic move that could reshape the future of the derivatives market.

With it, it allows CME Group to:

• Integrate operations: Streamline processes, potentially leading to cost savings and operational efficiencies.

• Enhance client services: Offer a wider range of services directly to clients, including trade execution, clearing, and risk management.

• Increase market share: Attract new clients and potentially develop innovative products.

However, the approval received has also raised concerns about:

• Regulatory risks: Increased scrutiny and potential conflicts of interest.

• Systemic risk: Concentration of power in one entity could increase market risk.

CME should take an active lead to address the “apparent” concerns while firmly securing a more entrenched future for itself in the derivative market.

Long-term, CME benefits from secular trends. It’s a Buy (from me, after your own in-depth due diligence!)

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