International Expansion And Client Growth Will Improve Future Net Margins

Key Takeaways

• Record growth in trading volumes and international business expansion are driving CME's revenue and positively affecting margins.
  
• Geopolitical uncertainties and client acquisitions are boosting demand for CME's risk management products and diverse offerings, enhancing revenue.
  
• Increased competition, regulatory uncertainties, and tech investments pose risks to CME Group's growth, revenue, and net margins amid geopolitical reliance and retail market volatility.

Catalysts

Operates contract markets for the trading of futures and options on futures contracts worldwide.

• The strong growth in CME Group's average daily volume (ADV), which reached a record of 28.3 million contracts in Q3 2024, is expected to continue. This suggests potential future revenue growth, as increased trading volumes across every asset class were achieved without lowering fees or introducing new incentives.
  
• The expansion of CME's international business, with record ADVs in EMEA and APAC regions, could continue to lower the effective tax rate, positively impacting net margins and net earnings due to the geographical mix of the income.
  
• The potential for ongoing and future geopolitical uncertainties, along with economic events such as U.S. elections and interest rate changes, may sustain or increase the current high demand for CME’s risk management products, likely driving revenue growth.
  
• New client acquisitions, particularly in the international markets and through retail channels, are contributing to broad-based growth in volume and are expected to further bolster revenues as more traders engage with CME's diverse product offerings.
  
• The company's focus on efficiencies, as demonstrated by portfolio margining programs producing significant cost savings for clients, could enhance CME's competitive edge and customer retention, leading to improved net margins and earnings growth.

CME Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CME Group's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 56.7% today to 55.6% in 3 years time.
• Analysts expect earnings to reach $3.7 billion (and earnings per share of $10.28) by about December 2027, up from $3.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.3x on those 2027 earnings, up from 24.7x today. This future PE is greater than the current PE for the US Capital Markets industry at 23.5x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.88%, as per the Simply Wall St company report.

CME Group Future Earnings Per Share Growth

Risks

• Investors may be concerned about the increased competition in the interest rate complex, particularly with new competitors launching SOFR futures, which could put pressure on CME Group's interest rate volumes and potentially affect revenue growth.
  
• The regulatory uncertainty around treasury futures being cleared abroad could pose a risk to CME Group's control over its products and the seamless operation of its clearing services, potentially impacting net margins if regulatory environments shift unfavorably.
  
• While there is strong international growth, the reliance on geopolitical events and election uncertainties for increased trading volume could present risks if these factors stabilize, possibly impacting future revenue growth and earnings.
  
• The reliance on new customer acquisition, particularly in retail trading markets, may bring volatility and unpredictability in trading volumes, potentially leading to fluctuations in revenue and net margins if conversion and engagement don’t meet expectations.
  
• The ongoing cloud migration and associated expenses, while part of long-term innovation, could continue to pressure short-term operating costs, potentially affecting net income growth despite revenue increases.

Valuation

• The analysts have a consensus price target of $239.12 for CME Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $275.0, and the most bearish reporting a price target of just $181.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.7 billion, earnings will come to $3.7 billion, and it would be trading on a PE ratio of 28.3x, assuming you use a discount rate of 6.9%.
• Given the current share price of $234.3, the analyst's price target of $239.12 is 2.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.