CME Group Down to Strong Sell - Analyst Blog

On May 15, 2014, Zacks Investment Research downgraded CME Group Inc. CME to a Zacks Rank #5 (Strong Sell) from a Zacks Rank #3 (Hold).

Why the Downgrade?

CME Group has been witnessing downward estimate revisions on the back of sluggish growth outlook, given the lack of any significant growth catalyst and intense competition, which escalate operational and financial risks. The company also delivered negative earnings surprises in 2 of the last 4 quarters with an average beat of merely 0.5%.

Additionally, this derivative exchange underperformed the one-year Nasdaq index, which posed growth of 19.3% against 11.7% clocked by the company.

On May 1, CME Group reported first-quarter 2014 operating earnings per share of 83 cents, which was in line with the Zacks Consensus Estimate but higher than the prior-year quarter figure by 13.7%.

A year-over-year top-line rise of about 8% was lower-than-expected due to lower average rate per contract and reduced revenues from access and communication fees. While most of the upside was driven by 9% growth in volumes, these constituted mostly lower-priced products across asset-class that require higher volume discounts. Moreover, total expense rose by about 3%.

Going forward, higher capital expenditure projected by management further raises concern. Additionally, CME Group's diversified product portfolio is significantly exposed to extreme interest rate volatility, stringent regulations and limited credit availability in the current unstable capital and credit markets.

Overall, weak fundamental growth prospects, regulatory challenges in the U.S. and Europe as well as sluggish market conditions have been failing to signal any positive investor sentiment at the moment.

Meanwhile, the Zacks Consensus Estimate for 2014 and 2015 declined 3.6% and 3.7% to $3.44 per share and $3.91 a share, respectively, in the last 30 days. No upward revision in estimates was witnessed for both these years.

Moreover, the Most Accurate estimate for CME Group's 2014 and 2015 earnings currently stand at $3.40 a share and $3.90 a share, respectively, resulting in an Earnings ESP of -0.3% for both the years, and reflecting a slow growth momentum.

Other Worthy Financial Stocks

While we prefer to avoid CME Groupfor the time being, some better-ranked financial stocks such as Ladder Capital Corp LADR, Euronet Worldwide Inc. EEFT and Fidelity National Information Services Inc. FIS are worth considering. All these stocks sporta Zacks Rank #1 (Strong Buy).