CME Earnings: Market Volatility and Higher Fees Lead to Strong Open to 2023

Wide-moat-rated CME Group CME reported strong first-quarter earnings as significant volatility, particularly in interest rate markets, drove high trading revenue. Net revenue increased 7% year over year and 19.4% sequentially to $1.44 billion, while earnings per share increased 24.6% from last year to $2.43. As we incorporate these results, we do not expect to materially alter our $215 fair value estimate for CME, and we view the shares as modestly undervalued.

CME’s transaction and clearing revenue, its largest source of revenue, rose 5.5% from last year, and 22.3% from last quarter, to $1.2 billion. Transaction revenue benefited from both strong volume and better pricing in its futures business, with average daily volume, or ADV, up 3.7% from last year’s quarter to 26.9 million contracts per day, the firm’s second-best result ever. The strength was primarily due to the firm’s interest rate contracts, which benefited from higher demand caused by the recent banking crisis, with ADV up 16.1% to 14.5 million contracts per day, including 16.7 million per day in March.

Additionally, CME’s average revenue per contract rose 3.1% year over year and 2% sequentially to $0.664. The firm’s average fee benefited from the first two months of transaction price increases pushed through earlier this year. CME’s price hikes this year were unusually large, with the firm expecting a 4%-5% in average pricing, assuming stable mix, compared to its more typical 1% to 2%. Despite the larger increase there does not appear to be any material impact on demand for its trading products and initial results suggest that the firm is likely to hit its target. CME’s revenue base is mostly transactional, which can lead to some volatility in results from quarter to quarter. While trading volume was strong during the quarter, much of this can be tied to events during the quarter, which only provides a temporary boost. However, the benefit of the firm’s improved pricing will prove more durable.