On November 03, 2023, CME Group Inc (CME, Financial) experienced a day's change of -2.48%, and a 3-month gain of 3.13%. The company's Earnings Per Share (EPS) (EPS) stands at 8.38. One might wonder, is the stock fairly valued? In this article, we delve into a comprehensive valuation analysis of CME Group Inc (CME), providing you with insights to make informed investment decisions. Continue reading to explore the company's intrinsic value, financial strength, profitability, and growth trends.
Company Introduction
CME Group, based in Chicago, operates exchanges that allow investors, suppliers, and businesses to trade futures and derivatives based on interest rates, equity indexes, foreign currencies, energy, metals, and commodities. Founded in 1898, CME Group went public in 2002 and has since consolidated parts of the industry through mergers and acquisitions. The company holds a 27% stake in S&P Dow Jones Indices, making it the exclusive venue to trade and clear S&P futures contracts. CME Group's stock price currently stands at $207.29, with a market cap of $74.60 billion. How does this compare to its GF Value, an estimation of its fair value?
The GF Value of CME Group (CME, Financial)
The GF Value is a unique calculation that estimates the intrinsic value of a stock. It's based on historical trading multiples, a GuruFocus adjustment factor derived from past performance and growth, and future business performance estimates. The GF Value Line provides an overview of the stock's fair trading value. If the stock price is significantly above the GF Value Line, it's overvalued, and its future return is likely to be poor. Conversely, if it's significantly below the GF Value Line, its future return will likely be higher.
Based on the GF Value calculation, CME Group (CME, Financial) is estimated to be fairly valued. With its current stock price of $207.29 per share, and a market cap of $74.60 billion, the future return of its stock is likely to be close to the rate of its business growth.
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Evaluating CME Group's Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. CME Group has a cash-to-debt ratio of 0.7, which ranks worse than 70.36% of 759 companies in the Capital Markets industry. Based on this, GuruFocus ranks CME Group's financial strength as 6 out of 10, suggesting a fair balance sheet.
Assessing Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. CME Group has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $5.30 billion and Earnings Per Share (EPS) of $8.38. Its operating margin is 60.61%, which ranks better than 89.23% of 650 companies in the Capital Markets industry. Overall, the profitability of CME Group is ranked 9 out of 10, which indicates strong profitability.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long-term stock performance of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of CME Group is 0.9%, which ranks worse than 64.17% of 681 companies in the Capital Markets industry. The 3-year average EBITDA growth rate is 6.2%, which ranks worse than 60% of 475 companies in the Capital Markets industry.
ROIC vs WACC
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, CME Group's return on invested capital is 1.58, and its cost of capital is 8.
Conclusion
In summary, the stock of CME Group (CME, Financial) is estimated to be fairly valued. The company's financial condition is fair, and its profitability is strong. Its growth ranks worse than 60% of 475 companies in the Capital Markets industry. To learn more about CME Group stock, you can check out its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
