On Nov 11, we issued an updated research report on CBOE Holdings Inc. (CBOE). The recovery in trading volumes and expense control following a weak second quarter have been commendable. However, though stiff competition and regulatory challenges play foul intermittently.
This Zacks Rank #2 (Buy) stock has delivered positive earnings surprise in three of the last four quarters with an average beat of 3.4%. The company’s third-quarter earnings beat the Zacks Consensus Estimate by 3.6% and surged 21.3% from the year-ago quarter figure.
Notably, CBOE Holdings’diversified product portfolio, compelling economic market modelandcore competencies fuel future growth prospects. Over the past years, CBOE Futures Exchange LLC (CFE) has significantly expanded its operations buoyed by an impenetrable business model.
Total average daily volumes at CFE have surged at a four-year (2009–2013) compound annual growth rate (CAGR) of about 137.7% and shored up 25% til Oct 2014, reflecting robust escalation through market recovery and product expansion.
Average daily volumes for VIX Index futures also improved 18% year over year in thefirst nine months of 2014 and surged 78% in Oct 2014, driven by heightened volatility and expanded global customer base. The expected launch of 10-year U.S. Treasury Note Volatility Index (VXTYN) on CBOE and CBOT in Nov 2014 will further strengthen the company’s foothold in the rapidly growing interest rate derivatives. Moreover, despite weak volumes in second-quarter 2014, operating margins improved by 20 basis points to 50.9% in the first nine months of 2014.
CBOE Holdings’ enjoys a strong balance sheet with healthy capital position, absence of long-term debt and low capital requirements. Alongside, incremental operating cash flow and no acquisitions on the horizon facilitate efficient capital deployment.
Although industry volatility, sluggish credit quality, intense competition and stringent regulations keep us wary, CBOE Holdings has the potential to broaden thescope of organic growthin the long run, thereby strengthening its competitive leverage as well.
Overall, a favorable risk-reward balance in the near term has led to positive estimate revisions for 2014 and 2015. As a result, the Zacks Consensus Estimate for 2014 and 2015 is pegged at $2.26 and $2.57 per share, up 2.7% and 1.1%, respectively, post third-quarter earnings release. On a year-over-year basis, earnings are expected to rise by 12.1% and 12.9% in 2014 and 2015, respectively.
Moreover, the Most Accurate estimate for CBOE Holdings’ 2015 earnings currently stands at $2.58 a share, resulting in an Earnings ESP of +0.4%. With no downward estimate revision, this indicates a likely earnings beat for both the years.
Key Picks in the Sector
Other players in the exchange industry that look attractive at current levels include Markit Ltd. (MRKT), CME Group Inc. (CME) and Intercontinental Exchange Inc. (ICE). All of these have the same Zacks Rank as CBOE Holdings.
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