CME Group (CME) is expected to announce earnings for the fourth quarter of 2012 on Tuesday, February 5. The exchange had a tough time through the first nine months of the year, as weak economic conditions and uncertainty surrounding market regulations led to a decline in trading activity. Transaction and clearing fees account for 80% of the company’s revenue, and a 15% year-on-year decline in the aggregate average daily volume through the nine months ending September led to an 11% drop in revenues earned during the period.
The fourth quarter provided little relief for the company, as the October volume was down 20% from the 2011 level, and the November volume was down 16%. December volumes were influenced by the traditional seasonal decline that the company usually observes during the holiday period.
CME is expected to recover in 2013, as new regulations requiring all over-the-counter (OTC) trades to be cleared through a central exchange will be implemented both in Europe and the U.S. Our $59 price estimate for CME Group’s stock implies a premium of 10% to the current market price
Competition For Interest Rates Contracts
Transaction and clearing fees from energy and interest rate contracts trades are the main sources of income for CME, accounting for about one-fifth of the revenues each. Both asset classes were affected by the slump in trading, as the November ADV for interest rates contracts was down 22% from the prior year, while the ADV for energy contracts was down 17%.
Although the trade volumes fell through most of 2012, new regulations requiring OTC trades to be cleared are expected to generate additional revenues of about 1.2 billion per year. Analysts at UBS (UBS) estimate a 25% increase in revenues from OTC interest rates swaps clearing.
However, CME will face competition from its rival, IntercontinentalExchange’s (ICE), which is set to acquire NYSE Euronext (NYX). ICE was established in 2000 by a consortium of energy companies and banks, and competes with CME in the energy contracts trading business. However, with the acquisition of NYSE’s Liffe business, it is also looking to enter the interest rates contracts business. Some 70% of Liffe’s revenues are generated through interest rates contracts. Please read our article: NYSE-ICE Deal Could Disrupt CME’s European Expansion for more details.
Disclosure: No positions.