On Apr 11, Zacks Investment Research downgraded CME Group Inc. CME to a Zacks Rank #3 (Hold).
Why the Downgrade?
CME Group witnessed a rank downgrade due to a decline in trading volume for the month of March, which was reported on Apr 2.
The trading average volume in March declined 3% year over year to 13.7 million contracts per day. This decline stemmed from a 26% fall in interest rate futures volume in the same month. Additionally, a 6% fall in the Eurodollar futures along with a 20% decline in the Treasury futures volume and a 23% decline in total energy and crude oil volumes led to the overall decline.
The Zacks Consensus Estimate for the quarter ending Mar 2015 decreased 1.04% to 95 cents per share as 5 out of 10 estimates moved south in the last 30 days.
Being a securities exchange, trading volume is a major source of revenue for CME Group. Although the company has diversified its product portfolio, it is still immensely dependent on trading volumes from two product lines (IRS and equity) for a significant portion of its clearing and transaction fee revenues, which constitute a major portion of net revenue.
Additionally, the company has been increasing its debt level. On Mar 6, CME Group announced the pricing of senior unsecured notes worth $750 million under its existing shelf registration statement. The long-term notes carry an interest rate of 3.00% and are slated to mature in 2025. Management intends to use the net proceeds to redeem, buy back or retire all 4.40% senior notes worth $612.5 million before maturity. The remaining amount will be used for general corporate purposes.
As of Dec 31, 2014, the company had a total debt of $2.1 billion deteriorating marginally by 0.03%. However, with the new issuance, the debt level is expected to increase along with debt capital ratio, thereby affecting the leverage ratio.
Stocks to Consider
Better-ranked players from the same sector include MarketAxess Holdings Inc. MKTX, AllianceBernstein Holding L.P. AB and AeroCentury Corp. ACY. All these stocks sport a Zacks Rank #1 (Strong Buy).
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