High interest rates have led to a record year for this stock.
For many growing companies, high interest rates have proven to be a drag on profits, but not for them. CME Group (NASDAQ:CME) operates the world’s largest derivatives market.
Operators of the Chicago Mercantile Exchange, Chicago Mercantile Exchange, and New York Mercantile Exchange reported record performance in 2023, primarily driven by a surge in trading volume in interest rate products.
Shares rose nearly 4% to $215 a share on Wednesday on record results and better-than-expected earnings. Here’s why it worked so well:
Record Year Due to Uncertainty
CME Group’s record year concluded with a fourth quarter in which revenue rose 19% to $1.439 billion and net income rose nearly 28% to $815 million, or $2.24 per share.
For the year, the company reported record revenue of $5.6 billion, up 12% from the previous year, and net income rose 18.5% to $3.2 billion, or $8.87 per share. On an adjusted basis, CME Group’s net income was $3.4 billion, or $9.35 per share.
The company’s revenue was driven by record average daily trading volume (ADV) of 24.4 million contracts traded on its platform last year. ADV in the fourth quarter increased 17% year-over-year to 25.5 million contracts. Fourth quarter ADV was the highest ever for a fourth quarter and 33% higher than the average for the last five years.
While CME Group saw double-digit ADV growth in four of the platform’s six asset classes, interest rate products were by far the largest. CME Group is the largest market for interest rate derivatives trading, so in years when interest rates rise, trading volume also increases.
In the fourth quarter, ADV for interest rate products surged 36% to 13.3 million contracts, marking the highest fourth quarter ADV ever. Most of that was in Treasury futures and options, with ADV up 44% to a record $7.7 million.
While rising interest rates have certainly led to increased trading volume, CME Group Chairman and CEO Terrence Duffy explained that this is actually an increase in trading volume. uncertainty It’s about turning up the volume.
“Having been in the industry for over 40 years, I have observed that trading volume is generally higher during periods of uncertainty about interest rate changes, regardless of whether interest rates are going up or down,” Duffy said. Announcement of 4th quarter results. “I’ve never seen so much disagreement about what the Fed can and can’t do. I believe this is a tailwind for CME Group and our interest rate products.”
Duffy detailed this ‘era of uncertainty’, saying the four rate hikes had increased interest rates by 16% in the first half of 2023. In the second half of the year, when there was no interest rate increase, this pace accelerated with interest rate ADV rising 24%.
More uncertainty ahead.
So while interest rates are expected to drop in 2024, much uncertainty remains about the direction of the economy, inflation, the Fed, and interest rates. This should bode well for CME Group.
In fact, the uncertainty drove ADV to an already record-breaking January of 25.2 million contracts, up 16% from the previous January. The ADV of interest rate products hit a record high in January at $13.1 million.
“2024 remains an era of uncertainty, and our products remain an important risk management tool for our customers,” Duffy said on the call.
CME did not provide revenue or revenue guidance in its presentation, but it expects adjusted operating expenses to be $1.585 billion in 2023, up slightly from $1.526 billion, and annual capital expenditures of $85 million.
However, with continued uncertainty and record January trading volume, CME Group is poised for another strong performance based on a very reasonable valuation with a price-to-earnings (P/E) ratio of 24 and a forward P/E of 22. In 2024.
