Description

Chigago Mercantile Exchange went public about 2 weeks ago,over 100 years old is the largest futures exchange in the US second largest in the world.They trade stock indices such as S&P's and NASDAQ,interest rate and eurodollar futures, foriegn currencies,and commodities.Revenue is generated from execution fee's,clearing fee's from transactions,data provision and pricing,volume information.The industry has grown revenues at an impressive 13% rate since 1990.The company will have 300MM in net cash and generate 100MM+ in free cash annually.The growth strategy is to expand the core business,mainly through Globex,add new products such as single stock futures,Third party clearing-only using 1/3 of current capacity,and acqusitions-there are 8 other exchanges in US,would enable them to leverage above capacity and eliminate overhead.

Valuation-Eq cap 1.5B less 300MM net cash,equals 1.2Billion EV
Revenues Net D&A Cap Ex Free Cash eps
2001 387 68 37 30 75 2.25
2002est 450 90 47 30 100 2.75
2003est 510 100 50 30 120 3.00
2004est 575 120 55 35 140 3.50

Estimates are my own assumptions using last 12 years growth rate,and assuming no accretive uses of free cash.My two year target on the stock is 70 dollars derived two ways.One at 3.50 eps in '04 at 17x eps,where a number of other exchanges trade, is 60,plus they will have 15 bucks in cash in two years is 75 total value.Method number two assumes in '04 they generate 140MM of free cash at a 7% yield would be 2Bill,plus 500MM cash is over 70 per share.

Catalyst

-Coverage by major firms rolls out in two weeks,I think my estimates will be conservative.
-Use of cash,investors are nervous they will do something stupid,these fellows don't seem like the stupid type,I think they will make smart acquisitions with the cash and leverage the infrastructure they have in place,or buy back stock from members each year when holding periods lapse.
-Demutualization is only 2 years old,so they are just getting started as public company after 100 years private,that plus the Commodity Futures Modernization Act a month later add up to management now incentivized to grow biz and show profits to increase their own stake-still own 90%.