CME shares drop after posting lower profit

22/04/2008 - 18:13

By Ros Krasny

CHICAGO (Reuters) - CME Group Inc , parent of the world's largest derivatives exchange, on Tuesday posted a lower-than-expected profit on thinner margins, and shares fell more than 10 percent.

First-quarter net income rose to $284 million, or $5.25 per share, from $130 million, or $3.69 per share, a year ago.

Excluding a benefit from a change in tax laws, CME earned $4.67 a share, below the average Wall Street estimate of $4.83 a share as compiled by Reuters Estimates.

Revenue rose to $625 million, missing the average analysts' forecast of $630 million.

An analyst with Fox-Pitt,Kelton, Edward Ditmire called that plunge an "exaggerated response" to the earnings miss. "This just isn't a stock that people are used to see miss earnings targets," he added.

Clearing and transaction fees, CME's biggest revenue item, rose by 28 percent to $525 million.

However, CME's average rate per contract, a key measure of margins, fell by 2.7 percent to 63.0 cents from 64.8 cents in the fourth quarter of 2007 and 64.0 cents a year earlier.

Jamie Parisi, CME chief financial officer, told analysts that the lower rate per contract represented "faster growth in lower-fee member volume than in higher-fee non-member volume."

The decline also reflected higher interest rate trading in CME's total product mix. The rate per contract for interest rate contracts was 50.5 cents, down 4.7 percent on the quarter.

First-quarter derivatives trading volume was previously reported at 13.7 million contracts per day, up 32 percent, but volume in March alone was up only 15 percent.

The initial months of global credit market turmoil that erupted in August 2007 increased volume for CME products as the Federal Reserve slashed official U.S. interest rates and share prices swung widely.

But some analysts have warned recently of slower growth ahead because of falling liquidity in financial markets.

Open interest, often a predictor of future volume, is running lower year-on-year in CME's biggest contract, Eurodollars, which are used to bet on and hedge against changes in interest rates.

CME officials said the process of "deleveraging" now under way at many financial institutions as a result of the global credit crunch should not hurt volume growth in the quarters ahead.

"We are not seeing much business being lost because of credit problems," CME chairman Terry Duffy told Reuters in an interview. "On the contrary, customers are coming to us because of the transparency we offer."

CME is set to acquire NYMEX, the energy and precious metals mart, for about $9.4 billion, subject to shareholder and regulatory approval. Duffy dismissed press reports that some NYMEX shareholders would pressure CME to raise its offer, saying that it had a definitive agreement with NYMEX.

The company's shares fell more than 10 percent, or $52.93, to $470.38 in morning trading on the New York Stock Exchange.

(Editing by Steve Orlofsky and Derek Caney)

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