CME (CME) 2014 Review

The CME Group is the largest futures exchange in the US and the largest clearinghouse in the world for trading futures and options on futures.  The company earns a 6%+ return on equity which is expected to trend back toward its historical 20%+ rate as it amortizes the goodwill it incurred as a result of recent acquisitions; it has grown its earnings and dividends 18-30% over the last five years.  That record should continue because:

(1) CME has the most diverse and widest array of products of any exchange in the world and is experiencing strong growth across that range of products.  That growth has been achieved from:

(a) acquisitions [Chicago Board of Trade, BM&F Bovespa exchange in Brazil, Credit Market Analysis and the New York Mercantile Exchange],

(b) technological and new product innovation [e.g. On-The-Run Treasury futures]

(2) operating leverage resulting from the increased revenue capture and scalability gained from electronic trading,

(3) geographic expansion particularly in emerging markets,

(4) cost controls.

Negatives:

(1)    vulnerability to trading volumes,

(2)    exposure to interest rate volatility,

(3)    low barriers to entry in electronic trading.

            (4)   government regulations.

CME is rated A by Value Line, carries about a 9% debt to equity ratio and its stock yields approximately 2.3%.

   Statistical Summary

                   Stock        Dividend         Payout      # Increases  

                   Yield      Growth Rate     Ratio        Since 2004

CME           2.3%           8                   51%              7

Ind Ave       2.0              7*                 30                NA 

                Debt/                      EPS Down       Net        Value Line

               Equity         ROE      Since 2004      Margin       Rating

CME          9%              6             2                  38             A

Ind Ave      33              13           NA               15            NA

  *most companies in CME’s industry don’t pay dividends

        Chart

            Note: CME stock made good initial progress off its January 2009 low, quickly surpassing the downtrend off its December 2007 high (red line).  However, it was only in mid 2013 that it was able to successfully challenge the November 2008 trading high (green line).  Long term, the stock is in a trading range (straight blue lines).  Intermediate term, it is in an uptrend (purple lines).  Short term it is in an uptrend (brown line).  The wiggly blue line is on balance volume.  The Dividend Growth Portfolio owns a 50% position in CME.  The upper boundary of its Buy Value Range is $30; the lower boundary of its Sell Half Range is $143.

http://finance.yahoo.com/q?s=CME

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