CME Group Inc. (CME)

Total return at 5 years: 4.4%/year = 2.4% appreciation + 2.0% dividend. The target price ($316) is ex-dividend; the $30 in dividends collected over 5 years are added separately.

The methods disagree: one places the value today above the price ($281) and the other below.

Today — expensive, no margin of safety: at $281 trades ~0.4% above its value discounted to today (~$280); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — En valor: the target price ($316) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$177.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($281) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (2.8%/year) than we project (5.2%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$4.7 bn of owner earnings in year 5 (vs ~$5.2 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on EV/NOPAT (resultado operativo ajustado por el ingreso recurrente de inversión sobre los fondos de garantía de clientes). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 is the TTM through Jun-30-2026 (10-Q filed Jul-24-2026, already ingested into XBRL: no re-basing needed). The Jul-22-2026 earnings release carries no formal revenue or EPS guidance for the current year — CME, as a derivatives exchange, does not guide because its revenue depends on trading volume, which management itself does not forecast; this absence is declared and the path anchors on the trajectory (§5 R1). The us-gaap:DepreciationAndAmortization tag for the TTM is stale (last fact as of Dec-31-2025, 181 days behind the rest of the core): TTM D&A was reconstructed by LEVELS from the 8-K's income statement (FY2025 107.5 + H1 2026 55.4 − H1 2025 54.6 = 108.3 million), without substituting a neighboring concept. The gain on the sale of the OSTTRA joint venture (US$306.1 million, Q4 2025) and the associated professional fees (US$22.1 million) are excluded from year 0 as money that doesn't come back (§0/§7): they are a non-recurring event within the TTM window. The valuation metric is not pure reported EBIT (65.1% TTM operating margin): CME operates a clearing house that invests ~US$158 billion of customer margin funds, and the net income from that investment (net of amounts credited to depositors, plus earnings from the S&P Dow Jones Indices and FanDuel Prediction Markets equity investees, less interest on its own debt) is structural and recurring to the clearing business — not a treasury surplus to ignore. Adjusting TTM EBIT for that normalized non-operating result (excluding the OSTTRA one-off), adjusted TTM EBIT is US$5,310.0 million (78.4% margin on revenue), and the resulting entry multiple (adjusted EV/NOPAT ≈25×) is consistent with where quality derivatives exchanges have historically traded, while on pure reported EBIT the implied multiple (≈30×) looks misaligned. This model's `ebitMargin` series carries the ADJUSTED margin (including net investment income), not the pure GAAP operating margin — declared so the row↔series correspondence is explicit. The adjusted-margin path decays modestly going forward (78.4%→75.8% in the base case) to reflect the risk that the interest-rate cycle compresses investment income on margin funds. With no net share buybacks (diluted count rose slightly from 359.2M in FY22 to 361.3M TTM, offset by the March 2026 preferred-stock conversion): no sharesPath is modeled; excess cash is redeployed via the regular-plus-variable dividend policy (`reinvestsExcess: true`), consistent with cash falling from US$4,416.9M to US$2,144.2M between the FY2025 close and Q2 2026 from paying the annual variable dividend — cash isn't accumulated, it's distributed. The dividend per share used as current (US$7.45) is the TOTAL declared for FY2025 (US$1.30 regular + US$6.15 variable, Feb-12-2026), not the quarterly run-rate ×4 (US$5.20) that Layer C suggests: that run rate captures only the regular component and materially understates CME's actual capital-return policy, which is predominantly variable. Debt: the automatic shortcut derives debt as zero, but the 8-K balance sheet (Jun-30-2026) shows long-term debt of US$3,424.2 million, a figure that matches the company's own release, which states total debt of US$3,400 million — that level is used in the year model's debt field and in `record.balance.totalDebtGross`.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $316 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $281, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $316 in 5 years plus $30 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $280. Against the current market price ($281), the margin of safety is -0.4% (trades above the maximum → a premium is paid) and the total return at that price would be 4.4% annually.

• Metric consistency. The entry multiple on pure reported EBIT (≈30×) looks misaligned; adjusted for recurring investment income on margin funds (≈25×) it is consistent with the quality of the business and with where global-scale peers trade.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (100%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Strong, predictable cash generation. TTM OCF of US$4,309 million on revenue of US$6,773 million, with minimal capex (US$96 million TTM) — a structurally asset-light business.
• Sustainably high ROIC. 12.12% TTM, above the 10% bar, measured on the balance sheet's real invested capital.
• Reinvestment runway. Future growth depends more on market volume and new regulatory mandates (Treasury and repo clearing) than on intensive deployment of the company's own capital.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

A derivatives exchange's revenue breaks down as traded volume (ADV) × average rate per contract (RPC), analogous to a marketplace's GMV × take rate. Q2 2026 shows a tough comparison against Q1 2026 (an all-time volume record) more than underlying weakness.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Quality of growth. Smooth, monotonic deceleration (11.1%→9.9%→6.4%→5.1% TTM), with no easy comps or one-off events to clean up; additional structural drivers (Treasury, repo, CMESC) are not baked into the base case.

• Recurrence and predictability of the business. Essential financial-market infrastructure (85% of volume comes from its own exchange members), with demand that does not depend on any single customer continuing to trade.
• Moat and its direction. Wide, stable moat: network effects, exclusive index licenses, CME Term SOFR. Not declared widening for lack of a measured, consolidated unit-economics gap (§3 Step 1 bis).
• Capital cycle / entrant competition. New entrants (FMX Futures Exchange, digital-asset platforms, prediction markets) seek to capture volume, though regulatory and network barriers remain high.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net debt / EBITDA 0.2x
• ✓Interest coverage (EBIT / interest)30.4x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 100% of ROIC
• !Value creation (ROIC − 10% bar)+2pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.9x — no over-investment
• –Float / working capitalNeutral WC
• ✓Dilution (SBC % of revenue + shares)SBC 1.5% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Net debt of ~US$1,149 million, barely ~1.1% of market value; investment-grade rating.

How cash comes in and how it is deployed. In green, the business's own cash (the owner-FCF it generates and reinvests); in gray, the float and credit — customer and funding money, which is not the shareholder's.

CME retains a minimal share of cash flow for reinvestment (capex of just US$96 million TTM) and distributes almost all the rest via a regular dividend plus a large annual variable dividend (US$6.15 of the US$7.45 declared for FY2025) and share buybacks (US$695 million in Q2 2026), keeping share count essentially stable.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Capital allocation. Minimal retention (capex ~2.2% of operating income); the rest is returned via regular plus variable dividend and buybacks, without unnecessarily accumulating cash.
• Alignment / skin in the game. CEO with 45 years at the company, but the proxy does not break out a verified aggregate insider-ownership percentage — the gap is declared.

• There is no clear evidence of missing buyers or motivated sellers at this price: the quality of the business (wide moat, high return on capital) is widely recognized by the market.
• The premium multiple (≈25× on adjusted operating earnings) is justified by the recurring investment income on customer margin funds, which the market does price in even though it does not appear as a separate line in reported EBIT.

It trades close to intrinsic value, far from the required margin of safety. The price reasonably reflects the quality of the business; the expected 5-year return depends more on whether the business keeps compounding than on a gap between perception and reality.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -2%/year (-12% total): the margin of safety protects the downside. The bull (+10%/year, +61% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Interest-rate sensitivity. Investment income on customer margin funds is sensitive to the level of Federal Reserve rates; an aggressive cutting cycle compresses the adjusted margin.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 12% above the 10% bar, but the price sits above value (no margin) → great business, expensive.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 5% at a multiple/growth of 4.9 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 5% (EBIT/EV) + ROIC 12% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 3% vs our 5%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -5%/yr, bull-scenario ceiling +8%/yr over 5y: reasonable asymmetry, without an ample cushion.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: network effects, cost advantage, intangibles, switching costs, efficient scale → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting 3%, within what we project (5%) — the story squares with the numbers.