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CBOE Is Well-Positioned In The Current Environment

Jun. 12, 2020 2:09 PM ETCboe Global Markets, Inc. (CBOE)CME, ICE, NDAQ5 Comments
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  • CBOE's stock has been lackluster over the last year.
  • The current environment with heightened trading and volatility is good for the company.
  • It is effectively allocating capital to growth acquisitions, dividend and share buybacks.
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Cboe Global Markets (BATS:CBOE) operates the largest options exchange and the third largest stock exchange in the US. In addition, it operates a stock exchange in Europe. The stock's performance has been lackluster over the last year, but I believe it is now well-positioned to outperform.

CBOE stock price chart

The company has a 1.5% dividend yield while you wait. If the company executes well, I believe the stock can rise to $125 for more than 25% upside from the current $98 level.

Company background

The company is headquartered in Chicago and has five business segments:

Options: This includes index options that are exclusive to the company, as well as non-exclusive equity and ETF options. 39% of revenue in the last quarter reported.

US Equities: Listed equities and transaction services on the company's exchanges. 51% of revenue.

Futures: Primarily VIX futures. 4% of revenue.

European Equities: Listed European equities transaction services. 4% of revenue.

Global FX: Foreign exchange trading services on the company's platform. 2% of revenue.

The company's sources of revenue are as follows:

Transaction fees: This fee is based on trade volume with tiered discounts for executing trades on its markets. 72% of revenue in the last quarter reported.

Access and capacity fees: These are fees for trading-related functionality, terminals, trading floor space and telecom services. 6% of revenue.

Market data fees: This covers the charge for proprietary and other market data. 6% of revenue.

Regulatory fees: This is primarily the option regulatory fee which supports the company's regulatory oversight function. In addition, the company collects fees on behalf of the SEC. 15% of revenue.

Other revenue: Primarily licensing revenue and from ads on the company's websites. 1% of revenue.

The company's operations continue mostly as normal in the COVID-19 age. Notably, it has benefited from increased trading volume in equities and options.

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This article was written by

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Run a long/short partnership. 25 years of experience in business and finance. CFA charter holder. Analysis is fundamental, focused on the numbers and takes a skeptical view of company declared pro-forma figures. Available for educational and entertaining speaking engagements. Institutional investors looking for short ideas may contact me.

Analyst’s Disclosure: I am/we are long CBOE. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (5)

Stock Scanner profile picture
Purewater: I believe the growth, especially in EPS, will be more than that. I don't know if the data you're looking at is of good quality. Most stable businesses (WMT, AAPL) are at about 25x. At this multiple you get a 4% return + inflation + economy/company growth, which is a good deal compared to 1% in Treasuries.
Sorsby: I believe they are. If you think otherwise, please provide the alternative data and source. What's presented is for the last reported quarter.
Purewater profile picture
Thanks for the reply...It's good quality to the extent that it is the average projections of a group of professional analysts. Doesn't mean they will be correct of course. Fast Graphs also pulls analyst projections and they show a similar expectation. I'm just curious why they think it's coming down so far from their 15% growth rate over the past 5 years. If they're right, I think 20-22x is a bit more appropriate than the historical PE of 25. Still a great company in a great industry. Long CBOE.
Revenue percentages are not accurate
Purewater profile picture
Why do you think 25x is appropriate? While they are recession proof and have above average profitability, they are also expected to grow by just 3.26% annually over the next five years according to Yahoo analyst estimates. I don't think that meager growth rate supports a 25x PE multiple.
Dylan Byrd profile picture
Any growth for a business that takes so little capital to run can do wonders for the PE multiple- even with the meager growth you mention- if the cost of capital is low enough.
Also, like the author kind of alludes to, this one hides $1 of earnings power from its acquisition amortization, so maybe not as expensive as it seems.
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