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I last reviewed CME Group Inc. (CME) in this December 5, 2024 post at which time the Q3 2024 results were the most current. With the release of the Q1 2025 financial results on April 23, 2025, I revisit this existing holding.
On April 23, CME entered into a new multi-currency revolving credit facility maturing on April 23, 2030. This Senior Credit Facility is for a line of credit of $2.25B with the option to increase the facility from time to time from $2.25B to $3.25B. The proceeds of the Senior Credit Facility can be used for ongoing working capital and other general corporate purposes and is voluntarily pre-payable from time to time without premium or penalty.
Interestingly, this new facility coincides with the announcement that CME and S&P Global (SPGI) signed a definitive agreement to sell OSTTRA, a leading provider of post-trade solutions for the global OTC market, to investment funds managed by KKR, a leading global investment firm. The terms of the deal equals a total enterprise value of $3.1B, subject to customary purchase price adjustments. Proceeds will be divided evenly between SPGI and CME pursuant to their 50/50 joint venture and the transaction is expected to close in the second half of 2025.
Business Overview
CME operates a derivatives marketplace which offers a range of futures and options products for risk management. It is where market participants turn to manage risk across the most diverse set of benchmark products.
I encourage you to review the company's website and Part 1 of the FY2024 Form 10-K.
This interview with CME's CEO provides additional context.
Financials
Q1 2025 Results
The Q1 2025 earnings release is accessible through the SEC Filing section of the company's website.
CME benefits from market volatility as noted in its April 23, 2025 Press Release.
Amid heightened economic uncertainty, CME Group operated with exceptional resilience as clients turned to our markets in record numbers to hedge business risks across asset classes," said Terry Duffy, CME Group Chairman and Chief Executive Officer. "This increased demand drove our Q1 Average Daily Volume (ADV) to a new high of 29.8 million contracts and generated record revenue, adjusted operating income, adjusted net income and adjusted earnings per share for the quarter. Commodities grew 19%, financials increased 12%, and our ADV outside the U.S. reached a new high of 8.8 million contracts, up 19% year over year. Looking ahead, we remain focused on providing the products, services and efficiencies to benefit market participants as they navigate this risk-always-on environment.
Operating Cash Flow (OCF), CAPEX, and Free Cash Flow (FCF)
In several previous posts I explain my rationale for deducting stock-based compensation (SBC) to determine a company's FCF. Since FCF is a non-GAAP measure, there is no consistency in its calculation. I, therefore, provide calculations using the:
- conventional method where only CAPEX is deducted from OCF; and
- more conservative modified method where I also deduct SBC.
FY2025 Guidance
CME does not issue any guidance.
Risk Assessment
The FY2024 Form 10-K provides an overview of CME's current portion of long-term debt and long-term debt.
In the Form 8-K filed on March 4, 2025, we learn that CME entered into an Underwriting Agreement with Barclays Capital Inc., J.P. Morgan Securities LLC and Wells Fargo Securities, LLC, as representatives of the underwriters named therein, in connection with the issuance and sale of $0.75B of 4.400% Notes due 2030 in an underwritten public offering. Proceeds were used to repay the short-term debt with a March 2025 maturity.
CME's senior unsecured long-term debt ratings are the lowest tier of the high-grade category and are investment grade. These ratings define CME as having a VERY STRONG capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree.
- Moody's: Aa3 with a stable outlook (affirmed November 20, 2024)
- S&P Global: AA- with a stable outlook (affirmed July 25, 2024)
- Fitch: AA- with a stable outlook (affirmed February 6, 2025)
These ratings are acceptable for my risk tolerance as I foresee no difficulty in the timely repayment of CME's obligations.
Dividend and Dividend Yield
The following is reflected in CME's FY2024 Form 10-K.
We intend to continue to pay a regular quarterly dividend to our shareholders, with a target of between 50% to 60% of the prior year's cash earnings. The decision to pay a dividend and the amount of the dividend, however, remains within the discretion of our board of directors and may be affected by various factors, including our earnings, financial condition, capital requirements, levels of indebtedness and other considerations our board of directors deems relevant. We are also required to comply with restrictions contained in the general corporation laws of our state of incorporation, which could limit our ability to declare and pay dividends.
CME's dividend history is accessible here.
My dividend related comments are essentially unchanged from those in my December 5, 2024 post with one exception. I anticipated CME would increase its quarterly from $1.15 dividend to $1.20 in early February. The dividend was increased to $1.25.
NOTE: In conjunction with the December 5, 2024 declaration of the 'special' dividend, CME indicated that it intends to continue its variable dividend structure. Beginning in 2026, however, the declaration and payment of the annual variable dividend will align with the first quarter regular dividend paid in March 2026 rather than at the end of the calendar year.
In FY2014 and FY2023, the weighted average outstanding diluted shares outstanding (in millions of shares rounded) was 336.063 and 359.550. In Q1 2025, it was ~360.227.
Shares are issued as part of the company's employee compensation programs. CME, however, has not repurchased shares in recent years thus leading to the steady increase in the weighted average diluted shares outstanding.
In December 2024, CME's Board approved a share repurchase program which authorizes the repurchase of up to $3.0B of the company's Class A common stock at prevailing market prices.
I anticipate CME will commence share repurchases in FY2025.
Valuation
In my December 5, 2024 post, I state:
CME's valuation at the time of my December 5, 2024 post using the ~$244.30 share price and the adjusted diluted broker estimates was:
- FY2024 - 17 brokers - mean of $10.22 and low/high of $10.11 - $10.35. Using the mean estimate, the forward adjusted diluted PE is ~24.
- FY2025 - 17 brokers - mean of $10.38 and low/high of $9.87 - $10.72. Using the mean estimate, the forward adjusted diluted PE is ~23.5.
- FY2026 - 14 brokers - mean of $10.83 and low/high of $10.12 - $11.41. Using the mean estimate, the forward adjusted diluted PE is ~22.6.
The ~$51 surge in CME's share price subsequent to my July 29 post has resulted in CME now being overvalued.
I am optimistic CME's FY2024 FCF will exceed ~$3.3B of FCF. I, therefore, use this estimate to gauge CME's valuation on a FCF basis.
Using ~360 million as a weighted average diluted shares outstanding in FY2024, I estimate CME will generate ~$9.17 of FCF/share (~$3.3B/360 million shares). With a ~$244.30 share price, the forward diluted P/FCF is ~26.6.
I consider CME to be fairly valued at ~$225 meaning shares appear to be overvalued by just shy of $20.
We now know that in FY2024, CME's FCF was $3.5965B and $3.507B calculated under the conventional and modified methods. The weighted average diluted shares outstanding in FY2024 was very close to ~360 million. CME, therefore, generated ~$10 and ~$9.74 of FCF/share under the conventional and modified methods. Using the ~$244.30 share price when I wrote my post, the P/FCF was ~24.43 and ~25.1.
CME's closing share price on April 25 is ~$266.30. Using this price and the current broker estimates, CME's valuation is:
- FY2025 - 17 brokers - mean of $11.14 and low/high of $10.54 - $12.25. Using the mean estimate, the forward adjusted diluted PE is ~24.
- FY2026 - 17 brokers - mean of $11.60 and low/high of $10.54 - $12.65. Using the mean estimate, the forward adjusted diluted PE is ~23.
- FY2027 - 10 brokers - mean of $12.51 and low/high of $11.61 - $13.63. Using the mean estimate, the forward adjusted diluted PE is ~21.3.
I anticipate CME's FCF conversion ratio will be very close to FY2023 and FY2024 levels. The P/FCF, therefore, is likely to be very similar to the FY2025 forward adjusted diluted PE level reflected above.
Since CME has very recently released its Q1 2025 earnings, not all brokers have updated their earnings estimates. Furthermore, a significant repurchase of outstanding shares could materially impact current earnings estimates. I also place very little credence in earnings estimates beyond the current fiscal year. I, therefore, recommend you place little reliance on these estimates in your investment decision making process.
Final Thoughts
In my December 5, 2024 post, I state that I hold 461 shares in a 'Core' account and 401 shares in a 'Side' account within the FFJ Portfolio. CME was my 14th largest holding when I completed my 2024 Mid Year FFJ Portfolio Review.
When I completed my 2024 year end review, CME was my 13th largest holding with 466 shares in a 'Core' account and 402 shares in a 'Side' account. With the reinvestment of the 'special' dividend from January 2025 and the March 2025 quarterly dividend, I now hold 476 shares in a 'Core' account and 411 shares in a 'Side' account. Unless I complete another review, I do not know CME's current ranking.
Despite the comments in my recent Dividends Have Drawbacks post, I am a CME shareholder because I like the business and long-term prospects.
Share repurchases is not a capital allocation priority but I think this is about to change. CME's Board approved in December 2024 the repurchase of up to $3B of Class A common stock at prevailing market prices. CME also negotiated a new multi-currency revolving credit facility and later this year it will receive proceeds from the sale of its 50% interest in OSTTRA.
Management has previously stated that it can grow its business without having to resort to strategic acquisitions. On several recent quarterly earnings calls, management speaks about the importance of new client acquisition (NCA). In Q1 2025, NCA surged 44% to over 83,000 new traders making it the 4th consecutive quarter of double-digit NCA growth.
Given this, I anticipate that the increase in its credit facility and the OSTTRA sale proceeds will be used to repurchase shares as opposed to a strategic acquisition.
My CME exposure will continue to increase since I automatically reinvest the dividend income. Having said this, I intend to increase my exposure but consider a fair value to be closer to ~$245.
I wish you much success on your journey to financial freedom!
Note: Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long CME.
Disclaimer: I do not know your circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decisions without conducting your research and due diligence. You should also consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
