CME Stock Trading at Discount to Industry at 22.46X: Should You Buy?

Core Viewpoint - CME Group's shares are currently trading at a discount compared to the Zacks Securities and Exchange industry, with a forward price-to-earnings ratio of 22.46X, lower than the industry average of 23.96X [1] Valuation and Performance - CME Group has a market capitalization of $80.5 billion and an average trading volume of 2 million shares over the last three months [1] - CME shares have increased by 14% in the past three months, underperforming the industry but outperforming the sector and the Zacks S&P 500 composite [2] - The stock is trading above its 50-day moving average, indicating a bullish trend and is near the high end of its 52-week range [4] Analyst Sentiment and Earnings Estimates - The Zacks Consensus Estimate for 2024 and 2025 earnings has risen by 0.8% and 0.4%, respectively, in the past week, reflecting positive analyst sentiment [5] Growth Factors - CME Group's organic growth is supported by increasing clearing and transaction fees, with an estimated three-year CAGR of 4.7% for the top line from 2023 to 2026 [6] - The company holds a 90% market share in global futures trading and clearing services, benefiting from growth in electronic trading volume and higher adoption of crypto assets [7] - Clearing and transaction fees are expected to grow at a three-year CAGR of 4.2% from 2023 to 2026 due to increased volatility [7] Financial Management and Shareholder Returns - CME is focused on improving margins through cost management, with core expenses projected to be $1.585 billion in 2024 [8] - The company has increased dividends at a five-year CAGR of 8.9%, with a dividend yield of 2.1%, surpassing the industry average of 1.5% [9] - CME's free cash flow conversion has remained above 85% over recent quarters, indicating strong earnings [9] Efficiency Metrics - Return on invested capital (ROIC) has hovered around 10% in recent years, but the trailing 12-month ROIC was 0.5%, below the industry average of 4.9% [10] - Return on equity (ROE) has been improving, with a trailing 12-month ROE of 12.8%, slightly below the industry average of 13.2% [11] Market Position and Future Outlook - CME Group is the largest futures exchange globally by trading volume and notional value, with plans to expand futures products in emerging markets and diversify its derivative product lines [14] - The average target price from 17 analysts is $216.76 per share, suggesting a potential downside of 3.1% from the recent closing price of $223.57 [14]