CME Stock Study (4-10-23)

I recently did a stock study on CME Group Inc. (CME) with a closing price of $195.10.

Value Line writes:

     > CME Group Inc. is the world’s largest and most diversified
     > derivatives marketplace. It enables clients to trade
     > futures, options, cash, and over-the-counter (OTC) markets,
     > optimize portfolios, and analyze date. It offers a range of
     > global benchmark products across major asset classes, incl.
     > interest rates, equity indexes, foreign exchange (FX),
     > agricultural commodities, energy, and metals.
     > Clearing/transaction fees (83% of ’22 rev.), Market
     > data/information services (12%), Other (5%). Acq. CBOT
     > Holdings, 7/07; NYMEX, 8/08.

Over the last 10 years, this medium-size company has grown sales and EPS at annualized rates of 6.7% and 10.3%, respectively. Lines are mostly up, straight, and parallel except for EPS spike in ’17 (probably due to TCJA), sales dip in ’21, and EPS dip in ’22. PTPM has been much better than peer and industry averages, going from 54.5% in ’13 to 69.5% in ’22 with a last-5-year average of 63.4%.

Over the last decade, ROE has been lower than peer and industry averages increasing from 4.4% in ’13 to 9.4% in ’22 while posting a last-5-year average of 8.7%. Debt-to-Capital has been much lower than peer and industry averages. This has ranged from 9.1% in ’17 to 14.5% in ’18 with a last-5-year average of 12.2%.

M* rates the company Exemplary for Capital Allocation while Value Line assigns an A rating for Financial Strength. Interest Coverage is 22.

Given all this, I am perplexed to see M* report a Quick Ratio of 0.02. In responding to another inquiry I had recently, M* wrote: QR = (Receivables + Cash and cash equivalent) / Current Liabilities . Applying that to the Value Line data shown in the left margin, this is (483.2 + 138065.3) / 137687.5 = 1.0. I have no qualm with that.

I forecast 3% long-term annualized sales growth based on the following:

• CNN Business projects 6.0% YOY and 4.9% per year for ’23 and ’22-’24 (based on 21 analysts).
• YF projects YOY 5.1% and 3.8% for ’23 and ’24, respectively (17 analysts).
• Zacks projects YOY 3.8% and 4.4% for ’23 and ’24, respectively (7).
• Value Line projects 4.3% annualized growth from ’22-’27.
• CFRA projects 2.4% YOY and 2.3% per year for ’23 and ’22-’24, respectively.
• M* gives a 2-year ACE of 4.8% annualized growth while projecting 3.9% in its analyst note.

I forecast 3% long-term annualized EPS growth based on the following:

• CNN Business projects 6.4% YOY and 5.0% per year for ’23 and ’22-’24, respectively (based on 21 analysts), along with 5-year annualized at 4.1%.
• MarketWatch projects 5.2% and 5.6% per year for ’22-’24 and ’22-’25 (20 analysts).
• Nasdaq.com projects 3.4% and 6.8% per year for ’23-’25 and ’23-’26, respectively [9, 4, and 1 analyst(s) for ’23, ’25, and ’26].
• Seeking Alpha projects 4-year annualized growth of 4.1%.
• YF projects YOY 6.3% and 3.0% growth for ’23 and ’24, respectively (17), along with 5-year annualized at 3.9%.
• Zacks projects YOY 6.2% and 2.7% growth for ’23 and ’24 (9) along with 5-year annualized at 3.7%.
• Value Line projects 7.2% annualized growth from ’22-’27.
• CFRA projects 2.0% YOY, 2.4% per year, and 3% per year for ’23, ’22-’24, and 3-year estimated CAGR, respectively.
• M* projects long-term annualized growth of 5.4%.

I am forecasting below the entire long-term-estimate range (mean of six: 4.7%).

My Forecast High P/E is 27. Excluding 13.0 in ’17, high P/E over the last 10 years has ranged from 27.3 (’15) to 38.4 (’20) with a last-5-year average of 35.5. With growth projected to slow, I am forecasting below the range.

My Forecast Low P/E is 19. Excluding 9.5 in ’17, low P/E over the last 10 years has ranged from 17.5 (’13) to 27.3 (’19) with a last-5-year average of 24.3. I am forecasting near the bottom of the range [’13 and ’16 (18.1), are lower].

My Low Stock Price Forecast (LSPF) is the default value of $140.40. This is 28.0% less than the previous close and 15.7% less than the 52-week low.

Excluding 51.4% in ’17, Payout Ratio over the last 10 years has ranged from 79.7% in ’18 to 150.7% in ’13 with a last-5-year average of 96.4%. Most of these numbers seem unsustainably high [I actually wonder if this portion of the data stream is corrupt]. I am forecasting below the range at 50.0%.

These inputs land CME in the HOLD zone with an U/D ratio of 0.7. Total Annualized Return (TAR) is 5.3%.

PAR (using Forecast Average, not High, P/E) is 2.4%, which is too low for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 20 studies done in the past 90 days (my study along with 7 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 5.1%, 5.5%, 28.4, 19.9, and 45.9%. I am lower on everything but Payout Ratio. Value Line projects a future average annual P/E of 22.5, which is lower than MS (24.2) and just lower than me (23.0). Overall, this study seems to have a small MOS.

With regard to other data, MS high and low EPS are $9.44/share and $6.63/share compared to my $8.58 and $7.39. My low EPS may be higher due to recent quarterly growth while my high EPS is lower due to a lower forecast growth rate. MS LSPF is $134.80 (4.2% less than mine). This is slightly higher than the default $6.63 * 19.9 = $131.94, which seems reasonable (MS LSPF is typically much lower than default).

I would look to re-evaluate this stock under $163/share.