CBOE - CBOE Global Markets

[ValueBuff]

I have been looking at CBOE.  A couple of points...pls feel free to add comments

 

If the derivative market becomes more regulated, it will need a clearing house/exchange.  CBOE is the leading options exchange.

 

debt free.

P/E of about 5x.

 

 

[king888]

P/E is about 20x not 5x ..

[Spekulatius]

Anyone follows this? I bought a few shares a couple of days ago. Seems cheapish  is for an exchange business relative to NDAQ, CME and others. This is likely because there were issue with the VIX ETN back in March when volatility went sky high (VIX is proprietary to CBOE) but does this impair the business permanently? I would think not.

They also acquired a business that deals with European futures that is still money losing this year and next, but might have potential in the future.

 

As I said, I own a small position but wonder if anyone has looked at this stock and has deeper insight.

[Jurgis]

I looked at this yesterday, since Barron's had a tiny paragraph on it. It looks like there has been no growth, so I stopped looking.

 

@Sanjeev: Please move this thread to Investment Ideas?

[Spekulatius]

I looked at this yesterday, since Barron's had a tiny paragraph on it. It looks like there has been no growth, so I stopped looking.

 

@Sanjeev: Please move this thread to Investment Ideas?

 

They IPO’d in 2010 @$29. They earned around more than $1.1that year. This year, they are a earning $5. That’s a 5x improvement in 10 years which isn’t bad.

 

The stock trades at ~18x earnings. Earnings benefit from volatility (which means more trading typically) so thry may go down a little just like they flatlined in 2010 and 2011 after the Great Recession , but the stock trades cheaper than it traded back then. To be fair, after the IPO, the share price sank to the low 20’s.

 

Still from a 10,000 foot perspective, this doesn’t seem like a bad deal, relative to it s past. I kind find many quality business where this is the case, most trade a elevated multiples compared to their past.

 

I try to find the reason why - there must be an issue that I am not aware of  VIX blowup? It still seems like people trade these things and now a retail version comes out apparently ::).

[Guest Schwab711]

We are going to have the same portfolio soon enough  8)

 

I own some CBOE. I've tried not to get too excited about current multiple vs prior since they added BATS, which is probably a lower quality business. 2018 was a great year due to the VIX speculation, but there seems to be evidence of fairly steady MSD growth over long-enough time periods. The amortization tax shield has been great and should be meaningful for a few more years. I like that there's low leverage and a relatively low normalized FCF multiple. At worst, I think CBOE could be an acquisition candidate, even if there are limited potential buyers. They could probably lever up considerably if they wanted to.

 

I have normalized FCF = NI + D/A + restructuring + SBC - capex (~$40m) = $585m (17x-18x multiple you mentioned, depending on the day)

 

I don't expect much more than 10% or so over time. This seems like a good defensive position to pair with some of my more aggressive bets that we've talked about.

[Jurgis]

Well, looking at M* numbers they had 0.44B revenue in 2010, 0.66B in 2016. Pretty much no growth. Then they bought BATS ( https://en.wikipedia.org/wiki/Cboe_Global_Markets ) and revenues jumped to 2.23B in 2017. And then their revenue went pretty much flat again. 2.5B in 2019.

 

So really saying that earnings went up 5x is misleading. They did not grow organically much.

 

Now, with 0.63B FCF and assuming 5% growth going forward, you can expect about 11ish% return based on DCF. That's really not bad in this market. And the business is not that bad. That's assuming they grow and don't go total flat or into a decline. What is your growth expectation of their business?

 

I started this post 3 hours ago and did not read what Schwab711 has written. So any similarities are clearly coincidental.  ::)

 

 

[Spekulatius]

There is some organic growth, but it is lumpy because it depends on trading volume. Seems a bit like the political add cycle where even years (2018,2020) are better than uneven ones. I looked at this truck in the past and it never seemed that interesting to me, as the multiples were on the high side relative to growth.

 

But now, with the multiple on the lower side of its historical range, while the market has moved to the very high side, CBOE seems more attractive. In addition, the current upheaval in the economy doesn’t really hurts CBOE and in fact it benefits from volatility, so I think it’s now more attractive from that angle as well.

 

I agree on a ~10% expected return going forward and may be that’s not the greatest bet out there, but it is a very low risk bet with no potential to blow up, unlike a bank stock for example. It’s a bit like my smallish SCHW position I recently acquired and maybe even better than the latter because it doesn’t  suffer as much from falling interest rates.