Saturday, March 25, 2006

Chicago Mercantile Exchange (CME) Analysis

Chicago Mercantile Exchange (CME) is the largest futures exchange in the United States for the trading of futures contracts and options on futures contracts, often called derivatives, as measured by 2005 annual trading volume. In 2005, the yearly trading volume of our products surpassed one billion contracts. CME posted record trading volume of 1.0 billion contracts in 2005, an increase of 33% over 2004, which was previously our busiest year. . CME's key products include CME Eurodollar contracts and contracts based on major U.S. stock indexes, including the S&P 500 and the NASDAQ-100. CME also offers contracts for the principal foreign currencies and for a number of commodity products, including cattle, hogs and dairy. CME is the clearing house for CBOT - Chicago Board of Trade.

CME - according to its 10-K has the following strengths.
• highly liquid markets
• global benchmark products
• diverse portfolio of products and services
• wholly owned clearing house
• proven and scalable technology and
• global reach.

CME has the following growth strategy
- expand our current core business;
- add new products;
- provide processing services and other business services to third parties; and
- pursue select alliances and acquisitions.

Now let us take a look at the financial data to see how CME is doing.

In 2005, the stock holders equity increased by 37% to 1.127 billion from 2004. In 2004, the stock holder equity was 812 million. The investment income increased three fold in 2005 from 2004 and again three times in 2004 compared to 2003. The interesting thing however is net income from operations. The net income increased by 37% in 2005 from 2004 and by 80% in 2004 from 2003.

From the stock dilution point of view - CME has diluted by 1.25% in 2005 from 2004. The dilution is reasonable and not over the top. Income per share increased by 37% in 2005 from 2004 and by 77% in 2004 from 2003.

However, the EPS growth has slowed in 2005 from 2004. The expectation is for the growth to slow further to around 25% per year in 2006 from the mid 30% in 2005. The growth is further expected to slow to 20% in 2007 from 2006. The forward P/E for the stock is at 39 and the trailing P/E is 49. The stock is fully valued at its current levels of $435=00/share. I would continue to monitor the stock for dips and possibly buy it when it dips.

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