CME Group poised for success in a 'winner takes all' market (NASDAQ: CME)

Pengana Capital

Pengana Capital Group

CME Group (NASDAQ: CME) is a US-based options and futures exchange operator that has sustainable competitive advantages, high incremental margins, is highly free cash flow generative and has an attractive growth outlook.

Derivative exchanges are characterized by network effects, which mean they tend to be ‘winner takes all’ markets in each underlying security. CME is by far the world’s largest derivatives exchange and in many instances doesn’t have any true direct competitors. In instances where CME does have competitors, it generally wins due to its scale.

These competitive advantages and earnings stability have allowed CME to invest more aggressively than its peers in its underlying business. The company has expanded internationally and most recently it acquired NEX Group in the UK, which we consider an important and strategic acquisition, as it will support ongoing growth of CME’s Foreign Exchange derivative business.

All of this comes at a price and CME is currently trading on a PE of 25 times 2019 earnings.

The company’s sustainable competitive advantages can be traced to its substantial network effects and other scale benefits. As the world’s largest derivative exchange it is the most capital efficient and cheapest venue to trade derivatives. We believe it has an unassailable competitive position in exchange-traded US interest rates derivatives, many agricultural derivatives, metals derivatives, WTI oil derivatives, and many equity derivatives.

We also believe that CME’s growth outlook has never been better. Over the past few years the company has aggressively invested in international expansion, the benefits of which are starting to be realised. In addition, CME is well positioned to benefit from a number of structural tailwinds. Growing demand for interest rate derivatives will be underpinned by the dual influence of increased US Treasuries issuance and the Fed winding down its balance sheet. In addition, thriving US oil production is driving demand for WTI derivatives. We also predict that the change in hedging accounting rules will enable corporates to use exchange-traded derivatives for hedging purposes.

We believe CME Group to be an attractive investment and have chosen to invest in this stock for these main reasons:

  1. Scale: CME is by far the world’s largest derivatives exchange and in many instances doesn’t have any true direct competitors.
  2. Growth: the company has recently expanded internationally.
  3. Efficiency: as the world’s largest derivative exchange CME Group is the most capital efficient and cheapest venue to trade derivatives.
  4. Demand: Use of derivatives is increasing concurrently with advantageous changes in industry regulations and international oil production.

You can read more investment insights from our Fund Managers here: (VIEW LINK)

Pengana Capital
Pengana Capital
Deputy Portfolio Manager, Pengana International Equities (ASX: PIA)
Pengana Capital Group
I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.


Sign In or Join Free to comment