Our look at the CBOE IPO concludes with a mostly positive view on the company and the deal. The only real sticking point is that the proposed pricing doesn’t leave much, if anything, on the table for investors in the short term.
But it’s a quality name that will be paying a dividend and may be able to exceed some of the forecasts that drive the valuation model. Until the dust settles and that’s true, we’d be a very price sensitive buyer of CBOE.
A snapshot diagram of the analysis and some brief comments are included here.
- Market: Very large and growing thanks to increased use of index options and other risk management tools.
- Position: CBOE has strong market share and agreements with index owners (like S&P) which help protect itsr business.
- Industry: Industry trends are favorable (more volume in general and an increasing proportion of it is CBOE-related), but rivalry is fairly high, leading to intense competition. This is one of the reasons that CBOE has to invest in a large processing center outside of NYC. Although the point can be argued, we are putting the government down here as a NA.
- Business: CBOE enjoys a very attractive business model which has been yielding net margins of 25%. Although investments in technology and innovation are required, it’s a captial efficient structure given the margins. The only disappointment is the rather high 40% tax rate which is difficult to reduce given the local scope of operation.
- Management: The management team is very experienced, been together a long time and have tackled some difficult transitions already.
- Culture: The company appears to have been able to preserve their roots as an open outcry exchange and yet grow into a company at least comfortable with and possibly relishing change and innovation.
Valuation: Unfortunately the company and their lead manager have done their homework on valuation. There isn’t any money being left on the table given the $28 mid-point of the filing range. Our base case IV comes to $27.47. It’s possible that the company may sustain higher revenue growth after their NY operation (C2) comes online late in 2010. But even dialing in better top-line growth brings our IV only to $30. (Note these figures are using a 25x P/E multiple.)
CBOE will be paying a healthy dividend based on a percentage of their operating profits so this stock will appeal to more yield/long-term holders at these prices.