CBOE Holdings - A Recession-Proof Company

| About: CBOE Holdings (CBOE)

Summary

For CBOE Holdings, trading volume is equivalent to revenue.

Trading volume for CBOE Holdings has been increasing over the years, unaffected by recessions and major events.

With its impressive balance sheet, CBOE Holdings has potential to be a good growth stock as well.

When the topic of recession proof industries come up in a conversation, food and beverage, utilities and healthcare are industries that are often mentioned.

I Google search "Recession-proof Businesses", one of the top articles is "10 Recession-proof Industries" by howstuffworks.com.

The article named the following as recession-proof business

  1. Non-cyclical Businesses (Utilities and Funeral Services)
  2. Healthcare
  3. Information Technology
  4. Discount Retail [Wal-Mart (NYSE:WMT) was singled out]
  5. Vice
  6. Education
  7. The Federal Government
  8. Repossession and Removal (Miss Junk was mentioned)
  9. Luxury Retail [Hermes (OTCPK:HESAF), LVMH (OTCPK:LVMHF), Gucci and Rolls Royce (OTCPK:RYCEY) were mentioned]
  10. Candy, Cosmetics and Contraceptives [Cadbury, Nestle (OTCPK:NSRGY) and Snickers were mentioned]

Companies were not mentioned in all of the categories, but many of us would know some of these companies off memory. These are definitely some of the industries that many people would think of as recession proof industries and companies.

Despite not being mentioned in the article, I believe CBOE Holdings (NASDAQ: CBOE) is a recession proof company as well. In general, I believe that reputable exchanges in USA are pretty much recession proof.

In theory, in a recession, investment funds, retail investors, banks, companies, government and whoever that invests in products listed on the exchange will need to trade. Regardless of the reason behind the trade, the act of buying and selling still occurs during a recession. For a company that relies on trades for revenue, this would make CBOE Holdings a recession-proof company in theory.

Before backing up my theory, I shall cover a bit about what is the CBOE Holdings.

The CBOE Holdings, is an exchange that provide a marketplace for the trading of options and futures contracts. The options contracts listed for trading include options on indexes, equities and ETFs.

An exchange earns money mainly by charging fees for transactions as well as charging money for market data. In my simple terms, you have to pay the exchange a fee when you make a transaction even if you don't like it.

CBOE Holdings is listed on NASDAQ on 2010. Below shows the price movement of CBOE since its IPO as derived from Google.

Click to enlarge

A recession proof company is a company that continues to make money in a recession. Below is the revenue of CBOE Holdings since 2008 in millions.

2008

2009

2010

2011

2012

2013

2014

2015

417

426

437

508

512

572

617

635

Click to enlarge

Below is the EPS of CBOE Holdings since 2008.

2008

2009

2010

2011

2012

2013

2014

2015

1.24

1.15

1.03

1.52

1.78

1.99

2.21

2.46

Click to enlarge

Revenue and EPS are on an uptrend since 2008. Revenue have been growing at a rate of 6.19% a year since 2008 while EPS have been growing at a rate of 10.28% a year since 2008.

Increasing revenue and EPS does not mean that CBOE Holdings is a recession proof company. One can argue that the earnings of CBOE Holdings has not seen a proper disaster or recession yet given that the earliest figure available to public starts from 2008.

To quell that worry, let's take a look at their trading volume since 1999.

Total number of trades in the year

Average daily trades

1999

254,331,851

1,009,253

2000

326,359,531

1,295,078

2001

306,667,851

1,236,564

2002

267,616,496

1,061,970

2003

283,616,496

1,126,772

2004

361,086,774

1,432,884

2005

468,249,301

1,858,132

2006

674,735,348

2,688,189

2007

944,471,924

3,762,836

2008

1,193,355,070

4,716,818

2009

1,134,764,209

4,503,033

2010

1,119,102,392

4,440,883

2011

1,204,882,013

4,781,278

2012

1,110,424,500

4,441,698

2013

1,147,449,222

4,553,370

2014

1,274,776,218

5,058,636

Click to enlarge

The figures were obtained from statistics reported by CBOE Holdings on their website.

I would like to highlight a few things that made me believe that CBOE Holdings is a recession proof company.

Increasing number of trades throughout the years.

Now that we have seen that CBOE Holdings's revenue and EPS have been increasing, these figures are now backed by trade figures which have been increasing since 1999. Trade volume statistics have not been affected by major events such as recessions and wars.

Dot com bubble and early 2002 market downturn.

One such crisis that impacted the world was the dot com bubble from 1997 to 2000. No figures were provided before 1999 by CBOE Holdings, but from 1999 to 2002, CBOE Holdings is not heavily impacted by events with trade volume increasing.

At around October 2002, NASDAQ and Dow Jones Industrial Average bottomed. In the same month, CBOE Holdings see an increase in trading volume, posting the second highest monthly trading volume figures at 26 million.

September 11 Terrorist Attacks

The time of terror, which resulted in September having the lowest number of trading days in USA for the year, CBOE Holdings post the highest average daily volume for the year. Although monthly figures were severely impacted by the reduced trading days, but monthly trading volumes were the highest.

Lehman Brothers

When Lehman Brothers filed for bankruptcy protection in September 2008, it shocked the world for the sheer size of the collapse. The trading volume on CBOE Holdings for September and October were the highest for the year.

Other Fundamentals

The latest ROE figure for CBOE Holdings stands at an amazing 80.09% and this is not fuel by debt as CBOE Holdings has no debt.

CBOE Holdings have been engaging in share repurchase and dividends issuance since 2010.

The operating margin for CBOE Holdings is at 50.42%.

Fundamentals of CBOE Holdings is excellent, which definitely gives it potential to be a growth company/stock.

Summary

Trades is where CBOE Holdings earns its money. CBOE Holdings makes money by getting paid for carrying out trades. Despite several financial crisis and major unpleasant world events happening throughout the past 17 years, CBOE Holdings has seen trade volume increase.

The trade volumes for specific months where events occur does not seem to bear any negative effect on the trade volume of CBOE Holdings as well.

Given that CBOE Holdings makes money from carrying out trades, an increase in trade volume during times of recession also means an increase in revenue during recession, which would effectively make it a recession-proof company.

CBOE Holdings currently holds zero debt along with very impressive operating margins as well as ROE figures. The company has also been engaging in share repurchase and dividend issuance since the year it was listed.

CBOE Holdings is definitely a stock I would want to hold during a recession, especially when the stock have the potential to be a growth stock as well.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.