In a Volatile 1st Quarter, CME Group Might Be the Big Winner

The first quarter of the year was a real roller coaster ride in the U.S. equity markets.  A big run-up in January was followed by an even bigger slide in February.  After peaking at 2782 on January, the S&P 500 index plunged to 2581 on February 8th.  Unfortunately, the nauseating ride wasn’t over and we saw several more large daily moves throughout February and March that helped move the CBOE volatility index (VIX – the market’s “fear gauge”) to a peak of 37 – a multi-year high.

Things have settled down considerably recently, with the S&P 500 basically unchanged on the year and the VIX back in the mid-teens – close to its historical average.

Clearly a lot of money changes hands during the tumultuous first quarter of 2018, and big banks Q1 results show it.  Both Goldman Sachs (GS) and Morgan Stanley (MS) beat Zacks Consensus Sales Estimates, aided by improved trading and brokerage revenue.

But what other companies might be the beneficiaries of the wild ride of the past few months?

Let’s take a look at an exchange that facilitates the trades that occur during volatile periods.

Chicago Trading Powerhouse

Since its inception as the Chicago Butter and Egg Board in 1898, the Chicago Mercantile Exchange (CME) has been a constant innovator in the creation and trading of futures and options products. After a merger with its crosstown rival the Chicago Board of Trade in 2007 and the acquisition of the New York mercantile Exchange (NYMEX) and the New York Commodities Exchange (COMEX) in 2008, the CME has emerged as the world’s leading marketplace for derivatives on agricultural commodities, equity indexes, interest rates, currencies, oil and precious metals.

The CME makes approximately 86% of its revenues from transaction and clearing fees on trades – with the balance coming from access/communication fees and selling market data.

During periods of market volatility, market participants of all stripes turn to the CME’s deep and liquid markets to hedge risk and/or speculate on future price movements.  

Originally an open outcry exchange where traders and brokers transacted business in person on a trading floor, the CME now does upwards of 90% of its volume on its Globex electronic platform. “The Merc” as it’s known to Chicago locals consistently outpaces similar exchanges CBOE Global Markets (CBOE) and the Intercontinental Exchange (ICE).

The first Quarter of 2018 was no exception.  

Growing Volumes Equal Growing Revenues

Thanks to huge interest in Interest Rate and Equity futures and options, the CME has increased trading volumes in 2018 by 28% over the same period in 2017.  Because its cost structure is relatively fixed, a big portion of additional trading volumes goes straight to the bottom line.

Here are the 2018 YTD volume figures from the CME website:


Zacks consensus Estimates for CME’s revenue from transaction and clearing fees in Q1 is $865M, an increase of 9% from the $792M they reported in Q1 of 2017.  


A quick look at the volume data shows that 1.35 Billion contracts have traded at the CME so far this year, almost 28% higher than the same period in 2017.  

Analysts are taking notice with 4 upgrades in the past 30 days, bringing the Zacks Consensus Earnings Estimate for 2018 to $6.86/share from $6.22/share 90 days ago and 44% higher than the $4.77/share reported in 2017.


Rising earnings estimates are a bullish indicator for a stock’s price and thanks to these upgrades, CME earns a Zacks Rank #1 (Strong Buy).

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Morgan Stanley (MS): Free Stock Analysis Report
Intercontinental Exchange Inc. (ICE): Free Stock Analysis Report
The Goldman Sachs Group, Inc. (GS): Free Stock Analysis Report
CME Group Inc. (CME): Free Stock Analysis Report
Cboe Global Markets, Inc. (CBOE): Free Stock Analysis Report
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Are Cigarettes Finally Dead? Phillip Morris Plunges

Philip Morris International (PM) shares are in free-fall this morning after announcing Q1 earnings that were actually slightly higher than analyst estimates.  Revenues were lower than expected however, and the future of the industry looks grim. 

The stock is currently trading down over 17% on the day at $84.49 after closing yesterday at $101.20.

The international producer of Marlboro cigarettes and other tobacco-based products – which was spun-off from U.S. producer Altria almost exactly ten years ago – reported earnings of $1.00/share in Q1 versus a Zacks Consensus Estimate of $0.88.  Revenues came in lower than estimates with the company posting $6.89B in sales, while analysts were expecting $7.02B.  Most of the increase in earnings was due to currency fluctuations and favorable tax rates rather than improved operations.  

Sales in regions Eastern-Europe, Africa and the Middle East, East-Asia and Australia, and Latin America and Canada all saw a decrease in sales by unit volume.  Only Southeast Asia saw mild sales growth.
Guidance for 2018 remained basically the same, though the range was adjusted slightly from $5.25 – $5.35/share to $5.25 – $5.40/share.

Industry-wide carnage

Other industry players are falling today as well on the news as investors ruminate on an uncertain future for tobacco. U.S. Marlboro producer Altria (MO) is down over 7% and British American Tobacco (BTI) – owner of R.J Reynolds – is down almost 6%.

Philip Morris has missed the Zacks Composite Earnings estimate in each of the last 4 quarters due to regulation, increased taxation and an overall decline in demand for tobacco products.

The 2008 spinoff of Philip Morris from Altria was intended to take advantage of international demand for tobacco products outside the purview of onerous U.S. regulation and it worked…for a while.  Now however, facing the same pressures worldwide as they once did in the U.S., Philip Morris is scrambling to replace traditional cigarette sales with alternative tobacco products.

Reduced Risk”, Really?

In the face of declining market, tobacco companies have embraced “Reduced Risk Products” (RRPs) to attract customers.  They are betting on heated tobacco products like vaporizers and smokeless tobacco as less-unhealthy choices for those who choose to continue to use tobacco.

Unfortunately for Philip Morris, sales of its iQOS vaporizer device were disappointing in Asia (the device’s primary market), as were sales of the “Heatstick” cartridges used in the iQOS.

Heated tobacco devices were seen as a potential savior for Phllip Morris and the industry as a whole, but demand seems to have leveled of globally faster than expected.

Investing in an industry whose potential savior is a group of products that still have the word “risk” in their name seems potentially unwise.

Income Play

The real “savior” of Phllip Morris and the whole industry – at least from investors’ point of view – has been a healthy dividend.  Philip Morris and Altria both pay a dividend of just over 4% and British American pays 3.7%.

With interest rates on the rise, however, dividend paying stocks look relatively less attractive, and with the future of tobacco so significantly uncertain, the ability of these companies to continue paying juicy dividends long-term is in doubt.

Philip Morris does have over $8B on the balance sheet, so the dividend looks safe for the time being.

With so many true growth stocks available to investors in truly innovative industries that are making our daily existence better, it’s difficult to justify investing in a dying sector like tobacco.

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Philip Morris International Inc. (PM): Free Stock Analysis Report
Altria Group, Inc. (MO): Free Stock Analysis Report
British American Tobacco p.l.c. (BTI): Free Stock Analysis Report
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Zacks Investment Research

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