CME Gains 11% YTD: Time to Buy the Stock at a P/E of 23.82X?

Shares of CME Group CME have gained 10.7% year to date, outperforming the industry, the sector and the Zacks S&P 500 composite.

With a capitalization of $91 billion, CME Group is the largest futures exchange in the world in terms of trading volume and notional value traded. The average number of shares traded in the last three months was 2.3 million.

A solid portfolio of futures products in emerging markets, diversified derivative product lines and global reach, along with its OTC offerings, increased electronic trading, cross-selling through alliances, and a strong global presence and liquidity position CME Group for growth.  

CME vs Industry, Sector & S&P 500 YTD

CME shares are trading above the 50-day and 200-day moving averages, indicating a bullish trend.

CME Price Movement vs. 50-Day, 200-Day Moving Average
 

CME Shares Are Expensive 

CME Group shares are trading at a discount to industry. The company’s price-to-earnings of 23.3X is higher than the industry average of 22.3X.
 

The stock is also expensive compared with other players like ICE Intercontinental Exchange Inc ICE and Cboe Global Markets CBOE.

CME's Average Target Price Reflects Potential Upside

Based on short-term price targets offered by 18 analysts, the Zacks average price target is $260.89 per share. The average indicates a potential 2.2% upside from the last closing price.

Optimistic Growth Projections for CME Instill Confidence

The Zacks Consensus Estimate for 2025 earnings is pegged at $10.72, indicating a 4.5% year-over-year increase on 4.1% higher revenues of $6.4 billion. The consensus estimate for 2026 is pegged at $11.18, indicating a 4.3% year-over-year increase on 4.6% higher revenues of $6.7 billion. The expected long-term earnings growth rate is 4.9%.

The consensus estimate for 2025 and 2026 earnings has moved 1% and 1.1% north in the past seven days, respectively, reflecting analyst optimism.

CME’s Return on Capital

Return on equity, which reflects the company’s efficiency in utilizing shareholders' funds, was 13.6% in the trailing 12 months, better than the industry average of 13.5%.

Return on invested capital (ROIC) hovered around 10% over the last few years, reflecting CME’s efficiency in utilizing funds to generate income. However, ROIC in the trailing 12 months was 0.4%, comparing unfavorably with the industry average of 5%.

Factors Impacting CME

Diversified derivative product lines consolidate CME Group’s market position. An exchange always benefits from increased volatility. Increased trading volume thus drives clearing and transaction fees that contribute a major share to the top line. 

CME’s investments are also showing desirable results. The company is focusing on improving margins through cost management. 
A solid capital position continues to support CME Group in accelerating organic market data growth, expanding its product breadth and engaging in capital deployment. 

Its free cash flow conversion of more than 85% over the last few quarters reflects its solid earnings.

Yet, CME is exposed to concentration risk.  Although the company has diversified its product line, it is still immensely dependent on trading volumes from two product lines — Interest rates and Equities — for a significant portion of its clearing and transaction fee revenues. 

CME Group operates in a highly competitive industry. Changes in regulatory reforms will likely intensify competition. While the derivatives exchange business is likely to see competition from the crypto platform, alternative instruments and the cash markets business are likely to face competition from other electronic communication networks, single-dealer platforms and bank-owned multi-participant platforms.

How to Play CME Stock

CME Group’s strength lies in organic growth. It is witnessing growth in electronic trading volume and higher adoption of crypto assets. A strong global presence, a compelling product portfolio, focus on over-the-counter clearing services and a solid capital position poise the company well for growth. 

CME’s dividend history is impressive, too.  It pays five dividends per year, with the fifth being variable and based on excess cash flow, making it an attractive pick for yield-seeking investors. 

Despite its premium valuation, an unfavorable ROIC and concentration risk, the tailwinds make this Zacks Rank #2 (Buy) stock worth adding to one’s portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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