CBOE Stock Trading at Discount to Industry at 22.50X: Should You Buy?

Tanuka De

Mon, Sep 30, 2024, 8:58 AM 4 min read

Cboe Global Markets, Inc. CBOE shares are trading at a discount to the Zacks Securities and Exchange industry. Its forward price-to-earning of 22.50X is lower than the industry average of 23.61X.

This company has a market capitalization of $21.2 billion. The average volume of shares traded in the last three months was 0.8 million.

The stock remains attractively valued compared with other players like Intercontinental Exchange Inc. ICE and Nasdaq Inc. NDAQ.

CBOE Trading at a Discout to Industry

Image Source: Zacks Investment Research

Cboe Global shares have gained 17.5% in the past three months, outperforming its industry, sector and the Zacks S&P 500 composite’s return in the same time frame. Strong market position, global reach, proprietary products’ strength and solid capital position continue to drive CBOE shares.

CBOE Outperforms Industry, Sector and S&P 500 in 3 Months

Image Source: Zacks Investment Research

CBOE Trading Above 50-Day Moving Average

Cboe Global shares are trading well above the 50-day moving average, indicating a bullish trend. Shares are trading near the high end of its 52-week range.

Positive Analyst Sentiment Instills Confidence in CBOE

The Zacks Consensus Estimate for 2024 and 2025 earnings has increased by 1 cent and 3 cents, respectively, in the past seven days.

The Zacks Consensus Estimate for 2024 and 2025 earnings indicates a year-over-year improvement of 10.8% and 5.7%, respectively. The company has a Growth Score of B.

Factors Favoring CBOE

CBOE’s impressive revenue growth reflects its organic strength. We estimate the 2026 top line to witness a three-year CAGR of 5.6%, largely driven by transaction fees. CBOE estimates organic total net revenue growth between 6% and 8% in 2024.

The top line also benefits from recurring non-transaction revenues. CBOE estimates Data and Access Solutions organic net revenue growth in the range of 7%-10% in the medium term. We estimate access and capacity fees in 2026 to witness a three-year CAGR of 5.5% and 2025 market data revenues to register a three-year CAGR of 4.6%.

CBOE’s inorganic growth story is impressive. The company achieved a greater global breadth of services and products, as well as new distribution channels apart from generating revenues and cost synergies through strategic buyouts.

Though there are cash outlays to enhance operating leverage, Cboe Global enjoys a strong liquidity position. Improvement in its cash position and a lower debt balance are helping CBOE to strengthen its balance sheet. The leverage ratio, as well as the times interest earned, compares favorably with the industry average.

Solid capital management supports strategic investments that drive growth, as well as helps the company distribute wealth to shareholders. CBOE increased dividends for 13 straight years and has $204.4 million left under its current share repurchase authorization.

CBOE’s Favorable Return on Capital

Return on invested capital hovered around 10% over the last few years. The company has raised its capital investment significantly, reflecting CBOE’s efficiency in utilizing funds to generate income. The return on invested capital in the trailing 12 months was 11.8%, higher than the industry’s average of 4.9%.

CBOE’s return on equity has been improving since 2019, reflecting its efficiency in utilizing shareholders’ funds. ROE over the trailing 12 months was 22.6%, outperforming the industry average of 13.2%.

Risks to CBOE

Despite the upside potential, there are a few factors that investors should keep an eye on.

Cboe Global's elevated expenses remain a major concern. For 2024, CBOE estimates adjusted operating expenses in the range of $795-$805 million.

Cboe Global has been facing intense competition due to increased market consolidation that tends to reduce market share, and this includes both product and price competition.

The company’s investment in European, Canadian and Asia Pacific operations remains exposed to volatility in currency exchange rates through translation of net assets or equity to U.S. dollars. The company is also exposed to credit risk from third parties, including customers, counterparties and clearing agents.

Average Target Price for CBOE Suggests a Downside

Based on short-term price targets offered by 16 analysts, the Zacks average price target is at $200.50 per share. The average suggests a potential 1.4% downside from Friday’s closing price of $202.60.

Parting Thoughts

CBOE is the largest stock exchange operator by volume in the United States and a leading market globally for ETP trading. A diversified business mix with recurring revenues, accelerated growth banking on recurring non-transaction revenues, use of technology and prudent buyouts poise it well for growth. A discounted valuation, better return and a VGM Score of B make the stock investors’ favorite.

Yet, higher expenses, as well as exposure to credit risk from third parties, including customers, counterparties and clearing agents, pose a risk. A lower target price reflects the muted sentiment of analysts.

Thus, it is better to adopt a wait-and-see approach for this Zacks Rank #3 (Hold) stock in the near term.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Intercontinental Exchange Inc. (ICE) : Free Stock Analysis Report

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