Downgrading CME Group to Hold

CME Group, Inc. (CME) intends to release its first quarter 2008 earnings before the markets open on April 22, 2008 with a conference call scheduled later in the morning. 4Q07 results were slightly below our estimates. We remain optimistic about the continued growth prospects, especially with the recent acquisitions and the global expansion initiatives and also expect CME to continue to benefit from the ongoing volatility in the markets.

However, recently announced plans for regulatory reforms in the financial sector, which include the merger of CFTC and the Security and Exchange Commission (though not likely to be implemented in the near future) may not be positive news for CME. Further, relative valuation continues to look very expensive and the current concerns for the sector continue to weigh on the shares.

CME currently trades at 25.1 times the consensus forward estimate (versus 31 times at the time of our last report), a 19% premium to the peer group's median (versus 42% premium at that time). On a price-to-book basis, the shares trade at a 2% premium to the peer median (versus a 39% discount as on January 8, 2008).

Relative pricing continues to look expensive on a price-to-earning-to-growth (PEG) basis, using the consensus forward estimate and the consensus long-term growth rate. CME's PEG ratio is 1.16, a 40% premium to the 0.83 median for the peer group (versus a 50% premium previously). On a price-to-book basis, the 2% premium looks stretched given a ROE 24% below median.

Valuation has always been our only real complaint about CME, so we watch it closely. We continue to note that each firm in this peer group is somewhat unique, that the range around the median is typically quite wide, and that the recent merger has skewed current pricing to a great extent. Further, given that we do not cover any of the current peers, we have limited additional insight into this.

Also, while CME continues to perform strongly, the concerns for the financials as a whole continue to weigh on the shares. Therefore, we are downgrading the shares of CME to a Hold with a price target of $550 per share.

$42 Target on Buy-Rated Williams

We are reiterating our Buy recommendation, earnings estimates and price objective for Williams Companies, Inc.'s (WMB) shares ahead of the company's quarterly results. The company remains well positioned to capitalize on attractive growth opportunities in its low-risk E&P business, and also enjoys strong leverage to continued strength in natural gas liquids margins in its midstream business.

The recent creation of a pipeline MLP and a $1 billion buyback program are some important catalysts for future growth. Our continued positive view reflects the company's strong upstream asset base and attractive growth prospects.

We believe that the company has moved beyond its restructuring phase and is now clearly ready to focus on growth opportunities. The company's E&P and midstream businesses are expected to be the key growth drivers going forward. We expect double-digit volume gains in 2008, after production growth in excess of 20% in 2007. The company's growing financial flexibility enabled it to recently raise its quarterly dividend by 11%, after raising the same by 20% in 2006.

Our unchanged $42 price objective is based on a sum of the parts approach. Using multiples of 8x, 10x, and 9x our projected 2008 EBITDA estimates for the E&P, pipelines and midstream segments, respectively, takes us to an enterprise value of approximately $30.5 billion. Netting out net debt of $6.4 billion and using a diluted share count of 620 million, we get a $41.73 per share value.