Financial Services Stocks

CME Group Inc Valuation – May 2018 $CME

Company Profile (excerpt from Reuters): CME Group Inc., incorporated on August 2, 2001, through its exchanges, provides products across all asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural products and metals. The Company’s segment primarily consists of the Chicago Mercantile Exchange Inc. (CME), Board of Trade of the City of Chicago, Inc. (CBOT), New York Mercantile Exchange, Inc. (NYMEX) and Commodity Exchange, Inc. (COMEX) exchanges. The Company provides electronic trading around the globe on its CME Globex platform. The Company also offers clearing and settlement services across asset classes for exchange-traded and over-the-counter derivatives through its clearinghouses CME Clearing and CME Clearing Europe. It also provides hosting, connectivity and customer support for electronic trading through its co-location services.

CME Chart

CME data by YCharts

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of CME – May 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $54,597,620,681 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.04 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 112.03% Pass
6. Moderate PEmg Ratio PEmg < 20 23.14 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.40 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.04 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.39 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $6.93
MG Growth Estimate 15.00%
MG Value $266.75
Opinion Undervalued
MG Grade D+
MG Value based on 3% Growth $100.47
MG Value based on 0% Growth $58.89
Market Implied Growth Rate 7.32%
Current Price $160.33
% of Intrinsic Value 60.10%

CME Group Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $3.35 in 2014 to an estimated $6.93 for 2018. This level of demonstrated earnings growth outpaces the market’s implied estimate of 7.32% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into CME Group Inc revealed the company was trading above its Graham Number of $97.31. The company pays a dividend of $2.64 per share, for a yield of 1.6% Its PEmg (price over earnings per share – ModernGraham) was 23.14, which was above the industry average of 22.78. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-17.88.

CME Group Inc scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$17.88
Graham Number $97.31
PEmg 23.14
Current Ratio 1.04
PB Ratio 2.40
Current Dividend $2.64
Dividend Yield 1.65%
Number of Consecutive Years of Dividend Growth 7

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2018
Total Current Assets $41,054,800,000
Total Current Liabilities $39,445,300,000
Long-Term Debt $2,233,500,000
Total Assets $69,919,300,000
Intangible Assets $27,066,900,000
Total Liabilities $47,146,500,000
Shares Outstanding (Diluted Average) 340,747,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $6.37
Dec2017 $11.94
Dec2016 $4.53
Dec2015 $3.69
Dec2014 $3.35
Dec2013 $2.92
Dec2012 $2.70
Dec2011 $5.43
Dec2010 $2.86
Dec2009 $2.48
Dec2008 $2.43
Dec2007 $2.99
Dec2006 $2.32
Dec2005 $1.76
Dec2004 $1.28
Dec2003 $0.72
Dec2002 $0.63
Dec2001 $0.51
Dec2000 -$0.04

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $6.93
Dec2017 $6.57
Dec2016 $3.73
Dec2015 $3.43
Dec2014 $3.35
Dec2013 $3.33
Dec2012 $3.41
Dec2011 $3.59
Dec2010 $2.65
Dec2009 $2.50
Dec2008 $2.39
Dec2007 $2.18
Dec2006 $1.64
Dec2005 $1.19
Dec2004 $0.81
Dec2003 $0.50
Dec2002 $0.34

Recommended Reading:

Other ModernGraham posts about the company

CME Group Inc Valuation – February 2017 $CME
CME Group Inc. Analysis – October 2015 Update $CME
14 Companies in the Spotlight This Week – 10/11/14
CME Group Inc. Annual Stock Valuation – 2014 $CME

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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