Taking Stock of the Exchanges

Adrienne Carter

I spent the past five days in Boca Raton (yes, it was 77 degrees and sunny). Unfortunately, I didn’t get to spend much time lounging by the pool (woe is me), as I was there for work, attending the big confab for the Futures Industry Association. It’s the annual gathering for finance types in the derivatives world, and all of the heads of the major exchanges are there.

(I think I ran into the chairman of the Chicago Board of Trade Charles Carey half a dozen times, and he was getting suspiciously tanner as the weekend wore on. Although so was I. But hey I tan easily.)

Much of the time was spent discussing hot button topics in the industry like the reauthorization of Commodities Trading Act, the recent wave of consolidation, and the tremendous volume across the industry. But one of the biggest trends in recent years has been the number of exchanges going public. Most recently, the big dog, the New York Stock Exchange.

Which got me to thinking, do exchanges make good stocks? They (who “they” are I don’t know) say that doctors don’t make good patients. Can the same be said of the exchanges?

Let’s take a look at the recent fortunes of the Chicago Board of Trade and the Chicago Mercantile Exchange—the largest commodities exchanges in the U.S. The CME led the charge, going public back in 2002 at $35. CBOT followed three years later with an IPO in late 2005 at a price of $54 a share.

There’s no denying these stocks have been hot commodities (alas I couldn’t resist such a pun). The CME currently trades at $429 and the CBOT at $123. And there is no denying the commodities business has been stellar, reaching record volumes quarter after quarter after quarter. They’re also making interesting moves internationally, developing key partnerships in the states, and smartly using technology to enhance their business. As a result, they both have strong growth prospects.

Now I hate to be a nudge. But here’s my biggest problem the stocks: those darn price-to-earnings ratios. Admittedly, I’m a bit of a value nut. So I start to choke when I see that the CME is trading at a P/E of 49 trailing 12 months earnings, and the CBOT has a P/E of 112 times earnings. To put that in perspective (well a least a certain type of perspective), Google is currently at a P/E of 69.

Now obviously Google has proven many a critic wrong. But in recent months the stock has dropped from a high of $475 to its current price of $345. The CME and CBOT operate in entirely different businesses. But I still worry when these down home Chicago boys with agricultural roots start to look like hot shot technology stocks.