CME Group Lags, Top-Line Exceeds - Analyst Blog

CME Group Inc (CME) reported its fourth quarter earnings per share of $3.77, way behind the Zacks Consensus Estimate of $3.81. Net operating income was $252.7 million in the fourth quarter 2010. The decline was primarily attributable to rise in operating and non-operating expenses and a series of charges in the reported quarter.

The net operating earnings in the fourth quarter of 2010 excludes the $51.3 million charge within tax expense to record the impact of combined state and local tax rates on the company's existing deferred tax liabilities due to revised state apportionment estimates resulting from annual state tax filings.

The result is also impacted by the $8.6 million charge to non-operating expense accelerated by termination of an interest rate swap associated with early payoff of a term loan.

Including the one-time charges, net income in the fourth quarter of 2010 was $196.2 million as against $202.6 million in the prior-year quarter, while net income in the fiscal 2010 was $951.4 million as opposed to $825.8 million in fiscal 2009.

CME Group's total revenue for the reported quarter increased 14% year over year to $763 million, exceeding the Zacks Consensus Estimate of $755 million. Revenue in the fiscal 2010 was $3.00 billion, marginally surpassing the Zacks Consensus Estimate of $2.99 billion.

The increase was primarily due to an increase in average daily volumes across all asset classes and a 12% hike in clearing and transaction fees to $625 million along with market data and information services revenue that grew 27% year over year to $104.1 million.

In addition, revenue earned from access and communication fee increased 9% year over year to $12.0 million while other revenues increased 23% year over year to $21.7 million.

CME Group's average daily volume was 12.0 million contracts, up 17% from the year-ago quarter. However, total average rate per contract decreased 4% from the year-ago quarter to 81 cents due to a larger volume coming from the interest rate product area, which has the lowest average rate per contract.

Total expenses increased 15% year over year to $304.8 million in the fourth quarter 2010, while it increased 15% year over year to $1.17 billion in the fiscal 2010. The expenses in fiscal 2010 include the write down in the second quarter 2010 of $20.5 million. The increase was primarily driven by the addition of the Dow Jones indexes in 2010, over-the-counter initiatives, regulatory issues, and technology investments.

Non-operating expenses were $31 million, primarily driven by interest expense and borrowing costs of $35 million, offset by $14 million in investment income. However, non-operating expenses were down 32% from $46.2 million in the year-ago quarter.

Balance Sheet

As of December 31, 2010, CME Group had $905.0 million of cash and marketable securities, up from $613.0 million as of September 30, 2010. The company had $2.1 billion in long-term debt, down from $2.5 billion at the end of the September 30, 2010. However, the long term debt was higher than $2.0 billion at the end of December 31, 2009.

Cash and cash equivalents grew to $855.2 million at the end of the reported quarter from $260.6 million at the end of the year-ago quarter. As of December 31, 2010, CME Group had assets totaling $35.0 billion (down from $35.7 billion as of December 31, 2009) while total shareholders' equity stood at $20.1 billion (up from $19.3 billion as of December 31, 2009).

Dividend Update

During the fourth quarter, CME Group's board approved an increase in its dividend payout policy to approximately 35% of prior year's cash earnings from approximately 30%. This would in turn result in an increase of the regular quarterly dividend by more than 20%.

Peer Groups

CME Group's rival NASDAQ OMX Group Inc (NDAQ) has reported its fourth quarter operating earnings per share of 55 cents on February 2, surpassing the Zacks Consensus Estimate of 50 cents and prior-year quarter earnings of 46 cents.

Other competitors, NYSE Euronext, Inc (NYX) and IntercontinentalExchange, Inc (ICE) are scheduled to report on February 8 and February 9, respectively.

Our take

Although operating cash flow remained strong, long-term debt obligations stood at a cautious level, positing financial risk to CME Group. Additionally, interest rate volatility and rising competition pose an operational risk to the company. Yet we believe that a gradual economic recovery and stable debt ratings are expected to drive volumes further. Moreover, the company's efforts to promote, expand and cross-sell its core exchange-traded business through meaningful acquisitions, a strong portfolio along with its global presence will generate a decent growth in the long run.

 
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