Friday, January 23, 2009

CME Group (NYSE:CME): Downgraded at JP Morgan and Sanford Bernstein

Two firms are out cautious/negative on CME Group (NYSE:CME):

- Sanford Bernstein downgrades CME to Market Perform saying they will re-evaluate 2009-12 future volume growth rate estimates based on revised outlook for the macroeconomic and financial markets and our reduced reliance on their regression-based future volume forecasts, which have broken down over the past 2 quarters. New price tgt is $200 for CME (and $80 for ICE which is also discussed in the note).

The biggest concern they have with regards to the CME is the weakening volumes the firm has seen in its interest rate futures complex. The credit markets have undergone a structural shift during the past 6-12 months in which securitization volumes have virtually dried up and corporate debt issuance (save for bank issuance guaranteed by the FDIC) has remained moribund since the failure of Lehman Brothers in September. Given these fundamental changes in the credit market, it will likely take some time before volumes in the CME's interest rate complex begin to recover to pre-LEH bankruptcy level.

Based on their updated macroeconomic forecast in which they do not expect to see an improving fixed income/credit environment until at least H2 '09, a domestic economic recovery until 2010, and sustained improvement in the domestic equity markets until 2010, they have adjusted their volume growth forecasts for all of the futures products. For the most part, their more negative macro-economic outlook has resulted in a reduction of our volume forecast for most futures products. This does not bode well for the profit potential of either CME or ICE.

- JP Morgan is out resuming their coverage on CME with an Underweight rating (prev. Overweight) and $145 price tgt.

With CME volumes falling due to the worst financial crisis in memory and estimates in need of downward revisions, they believe CME’s stock will slip lower near-term. Longer-term, they believe CME will be a leading beneficiary of the secular migration of OTC trading on-exchange driven by its industry-leading trading technology and product innovation, led by a strong management team.

Estimates too high and falling. JPM sees CME’s stock price under pressure as estimates continue to fall and trading volumes slow. Their ’09 estimate is well below consensus and they are concerned that weak volumes could persist into ’10. CME looks inexpensive at 12x ’09 estimate, given the quality of management and the long-term growth outlook. However, with a leveraged B/S and investments under water, they think valuation will drift lower, even if only temporarily.

Notablecalls: Since JPM was restricted on CME until the Nymex deal closed in 8/08, this is actually a downgrade.

Would say JPM's call is stronger than Sanford's downgrade to Market Perform.

Nonetheless, I think CME will see $160 level (or lower) today.

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