CBOE Global Stock Looks Undervalued
[Updated 12/23/2020] CBOE Group Update
Having gained 18% since the March bottom, at the current price near $90 per share, we believe CBOE Global’s stock (BATS: CBOE) has more upside potential. CBOE Global, one of the world’s largest exchange holding companies that provide trading and investment solutions to investors, has seen its stock rally from $77 to $91 off the recent bottom, compared to the S&P 500 which increased almost 65%. The stock is currently down 25% YTD and is lagging the broader market by a large margin. That said, there is a mismatch between CBOE Global’s stock and revenue growth – its top-line has grown 20% to a consolidated figure of $3.2 billion for the last 4 quarters from the consolidated figure of $2.6 billion for the 4 quarters before that. This growth was driven by higher transaction & clearing fees due to a jump in trading volumes, which is expected to normalize in the coming months. Hence, investors are cautious about CBOE’s prospects.
CBOE Global recently released its third-quarter results, outperforming the consensus estimates. It reported net revenues of $793 million – 17% more than the year-ago period, mainly driven by a similar growth in transaction & clearing fees due to higher U.S. industry trading volumes. The company generates the majority of its revenues from transaction & clearing fees, which are charged on a per-transaction basis. Hence, higher trading activity due to the recent Covid-19 crisis has benefited the CBOE’s top line. Further, as the economic condition improves, higher trading volumes are likely to normalize, negatively impacting its revenue growth rate. This justifies the investor caution toward the stock. However, given its strong fundamentals, we believe that CBOE Global stock can see some growth in the near term. Additionally, CBOE’s P/E multiple changed from just below 34x in 2017 to around 36x in 2019. While the company’s current P/E is close to 27x now, there is an upside when the current P/E is compared to the previous years – P/E of around 36x at the end of 2019 and 34x in 2017. Our dashboard Buy Or Sell CBOE Global Stock? provides the key numbers behind our thinking.
[Updated 10/20/2020] Is CBOE Global Stock Attractive At $82?
CBOE Global stock (BATS: CBOE) is approximately 7% ahead of the March 23 low of this year, and at the current price of around $82 per share, we believe the stock has more to go based on its historical P/E multiples. CBOE Global, one of the world’s largest exchange holding companies, has seen its stock move from $77 to $82 since the recent bottom compared to the S&P which moved around 55%. The stock is lagging the overall markets by a huge margin, as investors are overly cautious about its future revenues – the majority of its first and second quarter revenues came from the options and the U.S equities segments driven by higher trading volumes, which is expected to normalize in the coming months. Further, the stock is down 31% from levels seen at the end of 2019.
CBOE Global’s stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. We feel that the company’s stock still has potential as its valuation implies it has further to go.
Some of the rise over the last 2 years could be attributed to roughly 12% growth seen in CBOE Global’s revenues from FY 2017 to FY 2019. However, its net income figure declined by 7% over the same period. This negative growth could be attributed to higher net income figures in FY 2017 due to the one-time impact of the U.S Tax Act.
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While the company has seen some revenue growth over FY 2017-19, its P/E multiple has also increased. We believe the stock is likely to see some upside despite the potential weakness from a recession-driven by the Covid outbreak. Our dashboard What Factors Drove -32% Change in CBOE Global Stock Between FY 2017 And Now? has the underlying numbers.
CBOE Global’s P/E multiple changed from around 33x in FY 2017 to just below 36x in FY 2019. While the company’s P/E is close to 24x now, there is an upside when the current P/E is compared to levels seen in the past years – P/E of about 36x at the end of FY 2019 and around 33x at the end of FY 2017.
So what’s the likely trigger and timing for the upside?
CBOE Global is an exchange holding company and is one of the world’s largest option markets. It is best known for its multi-asset volatility products based on the VIX Index, widely used to gauge U.S. equity market volatility. While the company’s revenues have seen some growth in the first and second quarter on a year-on-year basis, the rise was partly because of the acquisition of Hanweck and FT Options, leading to higher market data fees. Further, revenue per contract for options trade decreased 24% in the second quarter followed by lower net transaction fees for futures and European equities. A large part of the revenues came from options and U.S equities due to higher trading volumes, which is expected to normalize in the coming months. Overall, transaction revenues are likely to see some drop in the subsequent quarters, partially offset by growth in the market data segment. Hence, investors are cautious about this stock, however, given its strong fundamentals and current P/E multiple, we believe that CBOE Global’s stock has upside in the near term.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
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