This article is proudly sponsored by the Business Ethics Team at the University of Texas at Austin!
About CME Group
We guess we’ll keep the “headquartered in Chicago, Illinois” theme going.
Being one of the city’s most historic, significant, educational, wealth generating institutions, the CME Group was founded in 1898 as a nonprofit entity and has since grown to be one of the world’s most established clearinghouses for financial markets and financial instruments of practically all types.
Specifically, CME operates a host of (financial) derivatives exchanges such as commodity markets (i.e., corn, soybean, crude oil etc..) as well as general futures, options, and believe it or not, options on futures, interest rate products and many other various financial products and accompanying instruments that are transacted upon each and every second of basically each and every day. Through these products and exchanges, when transactions are made, it “clears” them, meaning it essentially facilitates and keeps track of the relevant intricacies of each transaction performed by ensuring that accounts are settled, proper payments are being made and delivery is enforced if need be.
Jargon aside, the CME Group generates a considerable amount of its total annual revenues through making sure that transactions (likely millions, if not billions, each day) between buyers and sellers in these specialized markets go through without a hitch.
For this service, the company charges a fee (which varies per product, among other factors) per each proposed and completed transaction.
Lots of small nips at millions upon millions of daily transactions can obviously add up.
Initially, we might add that one of the more compelling aspects of this company and its business model is the fact that whether the markets are trending up, down or sideways, CME has developed a platform through which it can win through any of these scenarios.
Let’s say push continues shoving and the economy tanks within the next year or two.
There are likely to be troves of bearish, fearful sellers looking to offload some (if not most) of their positions and at the same time, leverage one or more of the CME’s financial products and hedge or bet on the continued demise of the economy.
Right or wrong, there are likely to be millions of traders doing this and on both of these transactions per trader, CME makes out pretty darn well through the fees it charges.
Options and futures are more complex financial instruments through which investors can, if they’re correct, of course, make money in a down market, prosperous market or a bland, sideways trending market.
This all makes for a pretty well insulated business model for the CME Group, at least, for the most part, as no one business is completely protected from the ebbing and flowing of the greater overall economy.
Enough about this company and its various products and offerings.
Let’s get into its numbers so as to determine whether or not its stock (NASDAQ: CME) is worth considering as a long-term investment opportunity.
CME Group’s stock financials
The CME Group is a nearly $66.53 billion company with a share price of $184.95, a prevailing price-to-earnings (P/E) ratio of 23.30 all while distributing an annual dividend of $4.40 to its shareholders.
To us, CME’s stock is in an especially interesting place when considering it as an investment since its present price-to-earnings ratio is just slightly higher than that of the standard fair value benchmark, 20.
This implies that the stock (NASDAQ: CME) is just a teeny bit overvalued at the moment, however, if there is some strong growth backing this company and/or stellar financials within, it just may be worth paying a slight premium for shares of this company’s stock.
Let’s venture forth and see what we can find out.
According to the company’s balance sheet, CME’s executives are tasked with handling and deploying around $174.1 billion in terms of total assets along with approximately $147.3 billion in terms of total liabilities, which to us, makes perfect sense.
Namely, at any given point, this company is going to have to potentially settle certain trades and/or accounts mixed with the fact that as trading and market exchange technology infrastructure become more and more complex (and necessary for that matter) and use of the Cloud and other emerging technological advancements come to roost, an organization like the CME Group is bound to rack up some debt(s) and other liabilities in the process.
As long as this company keeps its lending and margin standards strict and enforced on its platforms and the amount of its total assets remain greater than that of the value of its total liabilities while growing its technological prowess to ensure a better customer experience and the safe preservation of precious client data, we’re not going to be losing any sleep over CME’s current overall balance sheet structure.
As it pertains to its income statement, CME’s total annual revenues over the last five years have pretty much remained between $4 billion and the lower end of $5 billion, which is good to see since this is a business that seemingly relies heavily on fees that can fluctuate based off of investor’s overall appetites to be in the market.
Pictured above is Chicago, Illinois
This largely verifies our initial thesis that this business runs a fairly recession resistant business model as through most of the CME’s products, investors can bet against the market, bet on a prosperous market and even on the hunch that a sideways market is emerging.
This is proven in the company’s recent total annual revenue figures and the consistency thereof.
Cash flow (yes, according to the company’s cash flow statement) hasn’t been an issue at all (referencing 2018 and beyond), as the company’s net income and total cash from operations have both remained positive and consistent, even during the highs and lows of the current market environment following the COVID-19 rebound.
For some concrete perspective, CME’s total cash from operations over the years has remained at the mid-to-high range of $2 billion basically each year since 2018.
Thus, this company likely has fantastic margins, especially since it is a leader in the clearinghouse space.
CME Group’s stock fundamentals
Speaking of margins, TD Ameritrade’s platform has CME Group’s trailing twelve month (TTM) net profit margin at 55.99% to the industry’s average of 16.14%, which we’d say is, modestly speaking, of course, a material difference.
And by that we mean that the CME Group’s TTM net profit margin is one of the industry leaders and is fantastic from our perspective.
To dominate the industry (on average) by that wide of a margin is worth a round of applause but it also comes with the territory of handling what can be thought of as a nearly uncountable amount of transactions each second, each day with the infrastructure to perform and clear such transactions already in place.
CME Group plays a critical role in financial markets broadly and it definitely shows in its TTM net profit margin.
As it relates to the company’s TTM returns on assets and investment(s), CME’s are both greater than that of the industry’s averages.
For example, also according to TD Ameritrade’s platform, CME’s TTM returns on investment(s) stand at 7.69% to the industry’s average of 5.91%.
Should you buy CME Group stock?
For all of the ebbing and flowing markets in recent history, the CME Group sure does a fantastic job at keeping its total annual revenues consistent, its TTM net profit margin monstrous in relation to the average of the industry, its balance sheet in good health, its annual dividend is a heavy weight and its products and technology relevant to its customers.
Personally, we think this company’s stock, although a well established business, is worth paying a slight (nothing more) premium for, as the CME Group has a lot going for itself and through the worst and the best of recent market conditions, it has been able to retain users and continue collecting fees for its services.
We give the company’s stock a “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.