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Everyone loves to gamble. When I was 7 years old, I bet my friend Fritzy that he couldn’t hit a golf ball with a wiffle bat. Well Fritzy, although small in stature, was a more than capable Wiffle batter. Fritzy hit the golf ball over a tree and through Mrs. Hanley’s window. Afterwards Fritzy, sensing impending doom, ran around the yard in an elliptical pattern chanting, “I broke Mrs. Hanley’s window…I broke Mrs. Hanley’s window!”. I, on the other hand, was more concerned with how I was going to retrieve my golf ball, and then subsequently pay my bet.
Now as an adult, there are many other ways to make a bet. One way is to hook up with Titan Omega at the Orange Bowl and go out on the gamble boat that sails from Ft. Lauderdale. Of course, gambling on a casino boat is a lot more fun when you have 19” biceps and wear extra small golf shirts to make your Brachialis muscle look like a war club. Then what you do is smoke Partegases as long as your arm until the ship fire alarm goes off. Then you get up and scream, “Fire Fire, the ship is on FIRE!!”. Oh what fun.
For those of you who are more endomorphic in stature, there is still another way to gamble. Say you are a guy who is all faceful when you go to the gym. You can be a big man by starting up your own hedge fund, then go to the coffee shop and tell everyone how you run your own hedge fund. You neglect to tell anyone that your hedge fund underperforms $$$MR. MARKET$$$, so what you do is close down your original hedge fund and try a brand new hedge fund. At the end, it doesn’t matter, your biceps are still small and you still overconsume carbohydrates.
But the landscape is strewn with hedge funds. Every year there are more and more hedge funds. What do hedge funds do? Hedge funds hedge. What do they hedge with? For one thing, they use index futures, commodities, options and whatever else they can make a bet on. Global hedge funds rose to 8,100 last year from 6,200 in 1999. Assets under hedge fund management nearly doubled to $820 billion from $480 billion during that time. Further expansion is expected. More than half of European fund managers believe hedge funds will take business away from conventional investment funds in the coming year. Kind of reminds me of this movie:
The Chicago Mercantile Exchange is one of the world's premiere futures and options exchanges, offering a diverse range of financial products for institutional and retail investors. The CME has said the active money management style associated with hedge funds has helped boost trading volume to record levels at the exchange this year. Never heard of it you say? Granted, the Bears suck, the White Sox suck, the Bulls suck, the Cubs suck. But… the Chicago Mercantile Exchange trades more in the first two weeks of the year than the New York Stock Exchange does all year. Throughout its nearly 100-year history, the CME has maintained a firm commitment to providing the marketplace with risk management tools to capitalize on opportunities in domestic and international financial markets. The most recent example of this is the CME's emerging markets initiative, which resulted in the development of the Growth and Emerging Markets (GEM) division.
Today I bought Chicago Mercantile Exchange (CME) at 224.74. I will sell it in 4 to 6 weeks at 259.38. Here’s why I like CME:
CME stock is up 230% (vs. market return of 11%) in the last 12 months. $$$MR. MARKET$$$ knows that a stock’s price change over the past year proves to be a good indicator for its performance over the subsequent six month period. This strong relative strength is a good indicator that CME will continue to perform well. Its trailing PE is not low. In fact it is quite high, at 40. Hmmmm…sounds like $$$MR. MARKET$$$ himself has got the gambling itch with this high priced stock and sexy PE. Nonsense….the best is yet to come.
CME’s price climb has been extraordinarily remarkable ever since it went public. I’m more interested in the lack of volatility in its price ascension. For the last 12 months, the r-squared of this remarkable chart has been 0.92. For the last 3 months, it was 0.93. Take a look at this remarkable chart:
There is no question that as CME continues to break records, its chart will continue this awesome ascension. Day after day, the CME is breaking its own records for contract volume and open interest in several equity index contracts. Here are the records set on December 10, 2004:
Open interest records for equity index products set yesterday include:
-- E-mini S&P 500(R) futures - 1,235,440 positions
-- E-mini NASDAQ-100 futures - 535,590 positions
-- E-mini Russell 2000 futures - 183,874 positions
-- Nikkei 225 futures (Yen based) - 22,852 positions
-- S&P 500 options - 749,276 positions
-- E-mini S&P 500 options - 74,744 positions
-- E-mini NASDAQ-100 options - 2,765 positions
Total November volume was 67.9 million contracts against 67.5 million in October and 44.6 million in November 2003. Almost 67 percent of CME's volume traded on its Globex electronic platform, against 65 percent in October and a new record high. Average daily volume on Globex for the month was almost 2.28 million contracts, more than double the daily average from November 2003. The significance of this fact is that any incremental activity on the electronic platform generates revenue for CME but adds virtually no variable cost. In addition to the clearing fees it makes on electronic trades, the Merc also charges transaction fees that normally would go to the floor brokers. For each contract processed, they pocket about 70 cents. That's where the Merc makes its money. It collects a transaction fee every time a trade is made through the exchange. More than 80% of its revenue comes from transactions. Look at the fees generated from interest rate contracts alone:
Transaction Fees (in Thousands)
3Q 4Q 1Q 2Q 3Q
2003 2003 2004 2004 2004
Interest rates $ 39,403 $ 37,099 $ 44,803 $ 64,815 $ 69,750
To hedge their exposure to interest rates, more investors are turning to options on the Chicago Mercantile Exchange. I’ll get back to this fact later when I discuss earnings.
What about earnings? You can start with CME’s most recent quarterly report:
CHICAGO, Oct. 26 /PRNewswire-FirstCall/ -- Chicago Mercantile Exchange Holdings Inc. today reported record revenues and profits for the third straight quarter, with an 89 percent increase in net income for third- quarter 2004 compared with third-quarter 2003. These results were driven by continued strong volume growth in its benchmark products, particularly on the CME Globex® electronic trading platform, and the continued impact of third- party transaction processing. Net revenues climbed 42 percent to a record $192.4 million, compared with $135.0 million during the same period a year ago. Income before income taxes was $99.9 million, compared with $52.9 million. Net income was $59.4 million, versus $31.4 million. Earnings per diluted share rose 85 percent to $1.72 from $0.93 per diluted share. Yesterday, the company declared a regular quarterly dividend of 26 cents per share, payable on December 27, 2004 to shareholders of record on December 10, 2004.
Average daily volume was 3.2 million contracts for third-quarter 2004, a 29 percent increase from third-quarter 2003. Additionally, with average daily electronic volume of approximately 2.0 million contracts, trading on CME Globex grew 87 percent compared with the same period last year, and represented 61 percent of total volume compared with 52 percent in the second quarter and 42 percent in the third quarter a year ago. In September, trading on CME Globex averaged a record 2.2 million contracts per day, up 80 percent from September 2003. Growth in electronic trading also helps the Merc expand globally. The exchange has opened hubs in Paris, London and Frankfurt.
Clearing and transaction fee revenue from CME products increased 37 percent to $147.9 million, up from $107.8 million for third-quarter 2003. Revenue from clearing and trans-action processing services was $14.4 million. Quotation data fees were $14.9 million, versus $13.6 million in third-quarter 2003. While net revenues increased 42 percent, expenses increased 13 percent to $92.5 million, compared with $82.1 million in the year-ago quarter.
Income before income taxes was $99.9 million, an increase of 89 percent from $52.9 million for the year-ago period. The company's operating margin, defined as income before income taxes expressed as a percentage of net revenues, was 51.9 percent, compared with 39.2 percent for the same period last year. Net income was $59.4 million, or $1.72 per diluted share, compared with $31.4 million, or $0.93 cents per diluted share, for the same period in 2003.
For the first nine months of 2004, net revenues increased 35 percent to $545.8 million from $403.4 million for the same period in 2003. Clearing and transaction fees improved 27 percent to $413.8 million from $326.1 million, benefiting from higher trading volume and a greater percentage of trades executed on CME Globex. Total operating expenses were $272.2 million, versus $247.4 million for the comparable period of 2003. Income before income taxes was $273.6, up 75 percent from $156.0 million for the same period a year ago. Operating margin was 50.1 percent, compared with 38.7 percent for the year-earlier period. The company reported record net income of $162.8 million, or $4.74 per diluted share, for the first nine months of this year, compared with $92.5 million, or $2.73 per diluted share, for the same period in 2003. In 2004, the company has declared four quarterly dividends totaling $1.04 per common share, which amounts to approximately $35 million.
If you look at the full years for 2001, 2002 and 2003, the most dramatic income growth is coming directly from Clearing & Transaction from 292 million, to 356 million to 428 million. In fact this segment has grown each year for the last 7 years. No reason whatsoever to believe that this trend is going to stop at all. The only other trend that is growing as fast are the Salaries and Benefits….those pigs!
The Chicago Mercantile Exchange (CME) is establishing a telecommunications hub in Singapore in a bid to provide customers in the Asia Pacific region with expanded access to its electronic trading platform Globex. What is it about Singapore anyway?? How come so many people go to work for companies in the US and then they clamor for an international assignment in Singapore?? What a joke. I never understood the why people would disrupt their families so much just so that they could tell people that they worked in Singapore. I wouldn’t go to Singapore even if I had front row seats for Springsteen while drinking beer with David Ortiz and Manny Ramirez.
Anyway, CME is not complaining about these losers that go to Singapore. CME says the hub, which will be launched in the second quarter of 2005, will reduce connectivity costs for customers in the Pacific Rim. Customers using the Singapore hub will connect to Globex via circuits ordered through approved local telecommunication vendors. Customers will determine the bandwidth size for their connections, as well as the number and type of circuits. CME has established similar hubs in Europe, with six hubs launched this year in key European financial centres following the opening of a London datacentre in January 2002.
Ok…great stock. So what’s next? For starters, you have a 30% return on equity (vs. industry 18%), 27% profit margin (vs. group median 21%), and a history of excellent earnings growth. A higher net income to equity ratio suggests future outperformance. Stability through business cycles is demonstrated by the fact that Over the past year, earnings per share rose 50% and sales rose 30%. CME’s earnings for the year 2004 are projected to advance roughly 77%. Long term debt is zero….zippo…nada….goose egg.
CME % Industry %
Operating Margin 47 23
Sales Growth MRQ 43 13
Sales Growth TTM 30 17
Sales Growth 5 yrs 23 4
EPS Growth MRQ 86 7
EPS Growth TTM 50 41
EPS Growth 5 yrs 75 14
What a blowout. These comparative numbers look like $$$MR. MARKET$$$ when he goes to the gym in the morning and lifts heavy while everyone else in the gym is pulling rubber bands.
Operating earnings for CME have increased 54% in the last 12 months. Measuring the change in growth rate of operating earnings over time gives a good indication of future price performance. Analysis of the change in earnings over each of the last 4 quarters and the current quarter estimate shows strong acceleration in the quarterly growth rates, which should lead to a good improvement in earnings growth. Earnings forecasts from ANAL-ysts have been increasing recently, which indicates an improvement in future earnings growth. Over the past 60 days the changes in the estimates of CME’s future EPS have been much better than the median company. ANAL-ysts covering a company immediately adjust their earnings estimates when events occur that suggest it is appropriate to do so. Because of this, changes in consensus estimates may provide valuable information regarding the progress of the company. Within this industry, upward shifts in consensus estimates suggest superior future performance. The company has also reported earnings higher that those predicted in earlier estimates. This indicates an ability to exceed ANAL-ysts’ expectations and the potential for improving earnings growth in the near future.
These are all good signs that the future will be bright. How bright is the future? The ANAL-ysts say that in FY ’05, CME will pocket $7.20/share. Hold my beer for a second. I’m laughing so hard, I have to change my Depends. Here’s what the ANAL-ysts are missing. CME has reached a magical fulcrum point in its economic framework where the incremental revenues are all falling to earnings. This only happens once in a company’s life and it is just now happening for CME. How do I know this? The revenue growth (in millions) between the years 2001, 2002, 2003 and Sep 2004 were: $72, $57, and $129. However the EARNINGS Growth for the same periods was $26, $28, and $70. So what is happening is that for each incremental revenue dollar, you are seeing a much greater contribution to earnings. The percentage of earnings growth to revenue growth has risen from 36% in 2001 to 54% in Sep 2004. As ESPN would say, this is “inside the numbers”. Think of it this way. It’s kind of like the kissing booth at the church fair. You already paid for the girl and the booth. She gets a dollar for each kiss, but variable costs are zero. CME is a gigantic kissing booth.
This harkens back to the Globex platform and revenue growth associated with the fact that the Merc dominates stock index futures with a 95% share. The Merc is also looking to pare down the field by acquiring rivals. It's the only publicly traded futures exchange and it has $500 million in working capital to fund buyouts. It is a gorilla. It dominates the marketplace. As it acquires rivals, it will be able to set its own price. Oh the humanity! Aunty Em! Aunty Em!
So the ANAL-ysts say $6.37 in 2004 and $7.20 in 2005. That’s only 13% earnings growth year on year. What have they been doing, watching the Cartoon Channel?? First of all, $$$MR. MARKET$$$ sees 2004 earnings at $6.70 on total revenue of $746 million based on recent Fed hike activity, energy price volatility, and all of the fun that this brings to the hedge funds. Remember, CME gets $0.70 for each additional contract. As a result, $$$MR. MARKET$$$ believes that revenues for 2005 will be an amazing $965 million which will generate earnings of $9.11/share. Using today’s pumped up PE of 40, those kind of earnings will propel CME’s share price to a value of $364.11, which is well past my target price. Likin’ it? In the meantime, the share price will most certainly split, allowing holders of SIRI to buy some CME stock as well and making its stock price go up that much faster.
So what does the boss think of all of this? “CME is pleased to report its third straight quarter of record revenues and profitability, despite a typical summer slowdown," said CME Chairman Terry Duffy. "Average daily volume rose substantially over the same period a year ago due to the success of our diverse product line in meeting customer needs and our continued efforts to expand access to our markets through CME Globex. CME Eurodollars on Globex grew from one hundred thousand contracts per day in January to one million per day in September. Our foreign exchange products also set all-time volume records in September and for the third quarter." My 3rd grade teacher was Mrs. Duffy. Maybe she was Terry Duffy’s mother. Mrs. Duffy used to give me candy because I was smart.
"CME's continued strong performance is a testament to successful execution of our growth strategy to enhance CME products and services and extend them globally through new relationships and distribution channels," said Chief Executive Officer Craig Donohue. "In addition to expanding our core futures product volume through electronification, we are working to increase electronic trading of our CME E-mini® S&P® and Eurodollar options. Furthermore, our initiative with Reuters -- which will bring direct futures trading to the professional interbank foreign exchange market -- has generated a positive initial response, with seven leading global financial institutions set to begin beta testing in the fourth quarter." "We're in a very strong position to grow through mergers and acquisitions," Donohue said. "Our users want that. There are too many exchanges now."
There was a guy who lived in my dorm freshman year named John Donohue. Maybe he is Craig Donohue's brother? This is too much of a coincidence! I used to post funny stuff on the door to my room, and John Donohue used to always stand out in the hallway reading my door. Whenever I opened the door, I would smash into him. Later on he became my friend. I guess you could say he was the first reader of $$$MR. MARKET$$$ literature, other than Mrs. Duffy of course.
I am HUGE!!! Bring me your finest meats and cheeses!!
$$$MR. MARKET$$$
Now as an adult, there are many other ways to make a bet. One way is to hook up with Titan Omega at the Orange Bowl and go out on the gamble boat that sails from Ft. Lauderdale. Of course, gambling on a casino boat is a lot more fun when you have 19” biceps and wear extra small golf shirts to make your Brachialis muscle look like a war club. Then what you do is smoke Partegases as long as your arm until the ship fire alarm goes off. Then you get up and scream, “Fire Fire, the ship is on FIRE!!”. Oh what fun.
For those of you who are more endomorphic in stature, there is still another way to gamble. Say you are a guy who is all faceful when you go to the gym. You can be a big man by starting up your own hedge fund, then go to the coffee shop and tell everyone how you run your own hedge fund. You neglect to tell anyone that your hedge fund underperforms $$$MR. MARKET$$$, so what you do is close down your original hedge fund and try a brand new hedge fund. At the end, it doesn’t matter, your biceps are still small and you still overconsume carbohydrates.
But the landscape is strewn with hedge funds. Every year there are more and more hedge funds. What do hedge funds do? Hedge funds hedge. What do they hedge with? For one thing, they use index futures, commodities, options and whatever else they can make a bet on. Global hedge funds rose to 8,100 last year from 6,200 in 1999. Assets under hedge fund management nearly doubled to $820 billion from $480 billion during that time. Further expansion is expected. More than half of European fund managers believe hedge funds will take business away from conventional investment funds in the coming year. Kind of reminds me of this movie:
The Chicago Mercantile Exchange is one of the world's premiere futures and options exchanges, offering a diverse range of financial products for institutional and retail investors. The CME has said the active money management style associated with hedge funds has helped boost trading volume to record levels at the exchange this year. Never heard of it you say? Granted, the Bears suck, the White Sox suck, the Bulls suck, the Cubs suck. But… the Chicago Mercantile Exchange trades more in the first two weeks of the year than the New York Stock Exchange does all year. Throughout its nearly 100-year history, the CME has maintained a firm commitment to providing the marketplace with risk management tools to capitalize on opportunities in domestic and international financial markets. The most recent example of this is the CME's emerging markets initiative, which resulted in the development of the Growth and Emerging Markets (GEM) division.
Today I bought Chicago Mercantile Exchange (CME) at 224.74. I will sell it in 4 to 6 weeks at 259.38. Here’s why I like CME:
CME stock is up 230% (vs. market return of 11%) in the last 12 months. $$$MR. MARKET$$$ knows that a stock’s price change over the past year proves to be a good indicator for its performance over the subsequent six month period. This strong relative strength is a good indicator that CME will continue to perform well. Its trailing PE is not low. In fact it is quite high, at 40. Hmmmm…sounds like $$$MR. MARKET$$$ himself has got the gambling itch with this high priced stock and sexy PE. Nonsense….the best is yet to come.
CME’s price climb has been extraordinarily remarkable ever since it went public. I’m more interested in the lack of volatility in its price ascension. For the last 12 months, the r-squared of this remarkable chart has been 0.92. For the last 3 months, it was 0.93. Take a look at this remarkable chart:
There is no question that as CME continues to break records, its chart will continue this awesome ascension. Day after day, the CME is breaking its own records for contract volume and open interest in several equity index contracts. Here are the records set on December 10, 2004:
Open interest records for equity index products set yesterday include:
-- E-mini S&P 500(R) futures - 1,235,440 positions
-- E-mini NASDAQ-100 futures - 535,590 positions
-- E-mini Russell 2000 futures - 183,874 positions
-- Nikkei 225 futures (Yen based) - 22,852 positions
-- S&P 500 options - 749,276 positions
-- E-mini S&P 500 options - 74,744 positions
-- E-mini NASDAQ-100 options - 2,765 positions
Total November volume was 67.9 million contracts against 67.5 million in October and 44.6 million in November 2003. Almost 67 percent of CME's volume traded on its Globex electronic platform, against 65 percent in October and a new record high. Average daily volume on Globex for the month was almost 2.28 million contracts, more than double the daily average from November 2003. The significance of this fact is that any incremental activity on the electronic platform generates revenue for CME but adds virtually no variable cost. In addition to the clearing fees it makes on electronic trades, the Merc also charges transaction fees that normally would go to the floor brokers. For each contract processed, they pocket about 70 cents. That's where the Merc makes its money. It collects a transaction fee every time a trade is made through the exchange. More than 80% of its revenue comes from transactions. Look at the fees generated from interest rate contracts alone:
Transaction Fees (in Thousands)
3Q 4Q 1Q 2Q 3Q
2003 2003 2004 2004 2004
Interest rates $ 39,403 $ 37,099 $ 44,803 $ 64,815 $ 69,750
To hedge their exposure to interest rates, more investors are turning to options on the Chicago Mercantile Exchange. I’ll get back to this fact later when I discuss earnings.
What about earnings? You can start with CME’s most recent quarterly report:
CHICAGO, Oct. 26 /PRNewswire-FirstCall/ -- Chicago Mercantile Exchange Holdings Inc. today reported record revenues and profits for the third straight quarter, with an 89 percent increase in net income for third- quarter 2004 compared with third-quarter 2003. These results were driven by continued strong volume growth in its benchmark products, particularly on the CME Globex® electronic trading platform, and the continued impact of third- party transaction processing. Net revenues climbed 42 percent to a record $192.4 million, compared with $135.0 million during the same period a year ago. Income before income taxes was $99.9 million, compared with $52.9 million. Net income was $59.4 million, versus $31.4 million. Earnings per diluted share rose 85 percent to $1.72 from $0.93 per diluted share. Yesterday, the company declared a regular quarterly dividend of 26 cents per share, payable on December 27, 2004 to shareholders of record on December 10, 2004.
Average daily volume was 3.2 million contracts for third-quarter 2004, a 29 percent increase from third-quarter 2003. Additionally, with average daily electronic volume of approximately 2.0 million contracts, trading on CME Globex grew 87 percent compared with the same period last year, and represented 61 percent of total volume compared with 52 percent in the second quarter and 42 percent in the third quarter a year ago. In September, trading on CME Globex averaged a record 2.2 million contracts per day, up 80 percent from September 2003. Growth in electronic trading also helps the Merc expand globally. The exchange has opened hubs in Paris, London and Frankfurt.
Clearing and transaction fee revenue from CME products increased 37 percent to $147.9 million, up from $107.8 million for third-quarter 2003. Revenue from clearing and trans-action processing services was $14.4 million. Quotation data fees were $14.9 million, versus $13.6 million in third-quarter 2003. While net revenues increased 42 percent, expenses increased 13 percent to $92.5 million, compared with $82.1 million in the year-ago quarter.
Income before income taxes was $99.9 million, an increase of 89 percent from $52.9 million for the year-ago period. The company's operating margin, defined as income before income taxes expressed as a percentage of net revenues, was 51.9 percent, compared with 39.2 percent for the same period last year. Net income was $59.4 million, or $1.72 per diluted share, compared with $31.4 million, or $0.93 cents per diluted share, for the same period in 2003.
For the first nine months of 2004, net revenues increased 35 percent to $545.8 million from $403.4 million for the same period in 2003. Clearing and transaction fees improved 27 percent to $413.8 million from $326.1 million, benefiting from higher trading volume and a greater percentage of trades executed on CME Globex. Total operating expenses were $272.2 million, versus $247.4 million for the comparable period of 2003. Income before income taxes was $273.6, up 75 percent from $156.0 million for the same period a year ago. Operating margin was 50.1 percent, compared with 38.7 percent for the year-earlier period. The company reported record net income of $162.8 million, or $4.74 per diluted share, for the first nine months of this year, compared with $92.5 million, or $2.73 per diluted share, for the same period in 2003. In 2004, the company has declared four quarterly dividends totaling $1.04 per common share, which amounts to approximately $35 million.
If you look at the full years for 2001, 2002 and 2003, the most dramatic income growth is coming directly from Clearing & Transaction from 292 million, to 356 million to 428 million. In fact this segment has grown each year for the last 7 years. No reason whatsoever to believe that this trend is going to stop at all. The only other trend that is growing as fast are the Salaries and Benefits….those pigs!
The Chicago Mercantile Exchange (CME) is establishing a telecommunications hub in Singapore in a bid to provide customers in the Asia Pacific region with expanded access to its electronic trading platform Globex. What is it about Singapore anyway?? How come so many people go to work for companies in the US and then they clamor for an international assignment in Singapore?? What a joke. I never understood the why people would disrupt their families so much just so that they could tell people that they worked in Singapore. I wouldn’t go to Singapore even if I had front row seats for Springsteen while drinking beer with David Ortiz and Manny Ramirez.
Anyway, CME is not complaining about these losers that go to Singapore. CME says the hub, which will be launched in the second quarter of 2005, will reduce connectivity costs for customers in the Pacific Rim. Customers using the Singapore hub will connect to Globex via circuits ordered through approved local telecommunication vendors. Customers will determine the bandwidth size for their connections, as well as the number and type of circuits. CME has established similar hubs in Europe, with six hubs launched this year in key European financial centres following the opening of a London datacentre in January 2002.
Ok…great stock. So what’s next? For starters, you have a 30% return on equity (vs. industry 18%), 27% profit margin (vs. group median 21%), and a history of excellent earnings growth. A higher net income to equity ratio suggests future outperformance. Stability through business cycles is demonstrated by the fact that Over the past year, earnings per share rose 50% and sales rose 30%. CME’s earnings for the year 2004 are projected to advance roughly 77%. Long term debt is zero….zippo…nada….goose egg.
CME % Industry %
Operating Margin 47 23
Sales Growth MRQ 43 13
Sales Growth TTM 30 17
Sales Growth 5 yrs 23 4
EPS Growth MRQ 86 7
EPS Growth TTM 50 41
EPS Growth 5 yrs 75 14
What a blowout. These comparative numbers look like $$$MR. MARKET$$$ when he goes to the gym in the morning and lifts heavy while everyone else in the gym is pulling rubber bands.
Operating earnings for CME have increased 54% in the last 12 months. Measuring the change in growth rate of operating earnings over time gives a good indication of future price performance. Analysis of the change in earnings over each of the last 4 quarters and the current quarter estimate shows strong acceleration in the quarterly growth rates, which should lead to a good improvement in earnings growth. Earnings forecasts from ANAL-ysts have been increasing recently, which indicates an improvement in future earnings growth. Over the past 60 days the changes in the estimates of CME’s future EPS have been much better than the median company. ANAL-ysts covering a company immediately adjust their earnings estimates when events occur that suggest it is appropriate to do so. Because of this, changes in consensus estimates may provide valuable information regarding the progress of the company. Within this industry, upward shifts in consensus estimates suggest superior future performance. The company has also reported earnings higher that those predicted in earlier estimates. This indicates an ability to exceed ANAL-ysts’ expectations and the potential for improving earnings growth in the near future.
These are all good signs that the future will be bright. How bright is the future? The ANAL-ysts say that in FY ’05, CME will pocket $7.20/share. Hold my beer for a second. I’m laughing so hard, I have to change my Depends. Here’s what the ANAL-ysts are missing. CME has reached a magical fulcrum point in its economic framework where the incremental revenues are all falling to earnings. This only happens once in a company’s life and it is just now happening for CME. How do I know this? The revenue growth (in millions) between the years 2001, 2002, 2003 and Sep 2004 were: $72, $57, and $129. However the EARNINGS Growth for the same periods was $26, $28, and $70. So what is happening is that for each incremental revenue dollar, you are seeing a much greater contribution to earnings. The percentage of earnings growth to revenue growth has risen from 36% in 2001 to 54% in Sep 2004. As ESPN would say, this is “inside the numbers”. Think of it this way. It’s kind of like the kissing booth at the church fair. You already paid for the girl and the booth. She gets a dollar for each kiss, but variable costs are zero. CME is a gigantic kissing booth.
This harkens back to the Globex platform and revenue growth associated with the fact that the Merc dominates stock index futures with a 95% share. The Merc is also looking to pare down the field by acquiring rivals. It's the only publicly traded futures exchange and it has $500 million in working capital to fund buyouts. It is a gorilla. It dominates the marketplace. As it acquires rivals, it will be able to set its own price. Oh the humanity! Aunty Em! Aunty Em!
So the ANAL-ysts say $6.37 in 2004 and $7.20 in 2005. That’s only 13% earnings growth year on year. What have they been doing, watching the Cartoon Channel?? First of all, $$$MR. MARKET$$$ sees 2004 earnings at $6.70 on total revenue of $746 million based on recent Fed hike activity, energy price volatility, and all of the fun that this brings to the hedge funds. Remember, CME gets $0.70 for each additional contract. As a result, $$$MR. MARKET$$$ believes that revenues for 2005 will be an amazing $965 million which will generate earnings of $9.11/share. Using today’s pumped up PE of 40, those kind of earnings will propel CME’s share price to a value of $364.11, which is well past my target price. Likin’ it? In the meantime, the share price will most certainly split, allowing holders of SIRI to buy some CME stock as well and making its stock price go up that much faster.
So what does the boss think of all of this? “CME is pleased to report its third straight quarter of record revenues and profitability, despite a typical summer slowdown," said CME Chairman Terry Duffy. "Average daily volume rose substantially over the same period a year ago due to the success of our diverse product line in meeting customer needs and our continued efforts to expand access to our markets through CME Globex. CME Eurodollars on Globex grew from one hundred thousand contracts per day in January to one million per day in September. Our foreign exchange products also set all-time volume records in September and for the third quarter." My 3rd grade teacher was Mrs. Duffy. Maybe she was Terry Duffy’s mother. Mrs. Duffy used to give me candy because I was smart.
"CME's continued strong performance is a testament to successful execution of our growth strategy to enhance CME products and services and extend them globally through new relationships and distribution channels," said Chief Executive Officer Craig Donohue. "In addition to expanding our core futures product volume through electronification, we are working to increase electronic trading of our CME E-mini® S&P® and Eurodollar options. Furthermore, our initiative with Reuters -- which will bring direct futures trading to the professional interbank foreign exchange market -- has generated a positive initial response, with seven leading global financial institutions set to begin beta testing in the fourth quarter." "We're in a very strong position to grow through mergers and acquisitions," Donohue said. "Our users want that. There are too many exchanges now."
There was a guy who lived in my dorm freshman year named John Donohue. Maybe he is Craig Donohue's brother? This is too much of a coincidence! I used to post funny stuff on the door to my room, and John Donohue used to always stand out in the hallway reading my door. Whenever I opened the door, I would smash into him. Later on he became my friend. I guess you could say he was the first reader of $$$MR. MARKET$$$ literature, other than Mrs. Duffy of course.
I am HUGE!!! Bring me your finest meats and cheeses!!
$$$MR. MARKET$$$
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