Journalist ◆ Filmmaker ◆ Academic | CBOT reports jumps in revenue and profit

CBOT reports jumps in revenue and profit

Articles, Medill Reports

Published by Medill Reports

By Christina Maria Paschyn
Jan. 31, 2007

CBOT Holdings, Inc., the world’s second largest derivatives exchange, beat analysts’ expectations, reporting Wednesday that 2006 fourth-quarter profit more than doubled due to growth in trading volume and higher average rates per contract.

The company earned $44.9 million, or 85 cents per diluted share, for the quarter ended Dec. 31, compared with $17.7 million, or 34 cents per diluted share in the 2005 fourth quarter.  Excluding expenses related to the intended merger with Chicago Mercantile Exchange Holdings Inc., CBOT earned $54.4 million, or $1.03 per diluted share.

Analysts polled by Reuters Estimates had expected 99 cents per share.

Revenue hit a record high of $169.3 million in the fourth quarter, a 48 percent increase from $114.7 million a year ago.

Trading volume jumped 36 percent to 205.9 million contracts from 151.4 million a year ago. Average daily volume reached 3.3 million contracts, up 36 percent.

Credit Suisse Securities LLC analyst Howard Chen said he expects CBOT average daily trading volume will maintain its momentum into the 2007 first quarter.

“Keep in mind it’s still early in the quarter and comparisons are somewhat skewed by a half-trading day on January 2nd [Gerald Ford’s funeral],” Chen stated in a note to clients released yesterday.  “We’re expecting a modest pick up in volumes through the balance of the quarter to 3.5 million contracts, implying 14 percent year-per-year growth.”

Chen predicted that 2007 first quarter diluted earnings per share will be $1.05; he maintained his EPS estimate for the upcoming year at $4.50.

The average rate per contract rose 15 percent to 65.3 cents in the quarter, versus 57 cents in the year earlier period, benefiting from the company’s decision to allow electronic trading of agricultural products during daytime trading hours.  As a result, clearing and commission fees increased by 56 percent.

“This past year unquestionably had been a momentous one for the CBOT, as we took important steps to strengthen our competitive position in a consolidating marketplace,” CBOT President and CEO Bernard W. Dan stated in a press release.  “Our decision to merge with CME was paramount in our efforts to secure a stronger future for the CBOT, while benefiting our market users.”

The CME and CBOT announced their plan to merge in October; the transaction is expected to be completed by mid-2007.   The combined company, to be named CME Group Inc., a CME/Chicago Board of Trade Company, is valued at $25 billion.

CBOT incurred $9.5 million in merger-related expenses in the quarter, which are non-deductible for tax purposes and consist mainly of professional fees.  Total operating expenses were $93.5 million, down 3 percent from the same period last year, not including merger costs.

For the year, CBOT earned $172.2 million, more than double 2005’s net income of $76.5 million.  Diluted earnings per share were $3.26, or $3.44 excluding merger expenses, compared with $1.09 in the prior year.  Revenues rose 35 percent to a record $621.1 million from $461.5 million a year ago.

The company forecasted that baseline expenses in the first quarter of 2007 will be between $62 million to $65 million, without merger costs, compared with $72.5 million in the fourth quarter.

In early trading Wednesday, CBOT stock dropped to $168.51, down 64 cents.  The stock price moves with that of CME Holdings, because the merger agreement specifies that CBOT shareholders will receive .3006 share of the merged company for each share of CBOT.

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