CBOE Holdings Inc. (CBOE) reported fourth-quarter 2014 operating earnings of 64 cents per share, which missed the Zacks Consensus Estimate of 66 cents but outpaced the year-ago figure of 52 cents by 23%.
With this result, the company’s average four-quarter beat stands at 0.6%. Additionally, net income escalated 45.6% year over year to $53.6 million. Including extraordinary items, reported net income stood at $49.1 million or 58 cents a share against $45.6 million or 52 cents per share.
Total operating revenue grew 17% year over year to $166.5 million and breezed past the Zacks Consensus Estimate of $166 million. The year-over-year growth in revenues was due to transaction fees of $122.7 million (up 23.9% year over year), regulatory fees of $8.6 million (13.2%), market data fees of $7.7 million (10%) and other revenues of $3.6 million (9.1%). These were partially offset by declines in access fees of $14.5 million (down 5.2%) and exchange services and other fees of $9.4 million (2.1%).
Average daily volume jumped 15% year over year to 5.64 million, while total trading volume also grew 15% to $361.2 million, reflecting enhanced market volatility. Moreover, average revenue per contract increased 8% to 34 cents due to a shift in product-mix toward high-margin index contracts and positive fee adjustments.
However, total operating expenses rose 14.9% year over year to $79.5 million. Adjusting for volume-based expenses, depreciation and amortization, accelerated stock-based compensation expenses and unusual or one-time expenses, core operating expenses increased 11% $44.4 million in the quarter.
Core operating income soared 22% year over year to $88.8 million. Core operating margin also improved to 53.4% from 51.2% in the year-ago period. However, effective tax rate rose to 39.4% from 36.1% in the year-ago quarter.
Highlights of 2014
For full-year 2014, CBOE Holdings reported operating earnings of $2.28 per share, missing the Zacks Consensus Estimate by a penny, although it outperformed the 2013 equivalent of $2.03 a share. Operating net income grew 10% year over year to $194.5 million.
Including extraordinary items, reported net income stood at $188.4 million or $2.21 per share in 2014, compared with $173.9 million or $1.99 a share in 2013.
Total operating revenue increased 8% year over year to $617.2 million, almost on par with the Zacks Consensus Estimate of $617 million. Total core operating expenses rose 6% to $299 million, while core operating margin improved to 51.6% from 50.8% in 2013. Effective tax rate stood at 38.2% against 37.8% in 2013.
Financial Update
As of Dec 31, 2014, CBOE Holdings had cash and cash equivalents of $147.9 million, down from $221.3 million at 2013-end. Total assets stood at $383.9 million at the end of Dec 2014, down from $441.6 million at 2013-end.
Meanwhile, long-term liabilities were $61.9 million, up from $49.6 million at 2013-end, while total shareholder equity fell to $250.1 million from $284.5 million at 2013-end. However, operating cash flow improved 17.1% year over year to $262.7 million at the end of 2014.
Share Repurchase Update
CBOE Holdings repurchased about 0.49 million shares for $28.7 million during the reported quarter, while about 3.2 million shares worth $168.3 million were bought back in 2014. Moreover, shares worth $310.4 million have been repurchased since the inception of the share buyback program in 2011.
On Jul 30, 2014, the company’s board sanctioned the repurchase of an additional $100 million worth of common stock, expanding the previous repurchase program of $100 million announced in Dec 2013.
Including shares remaining from the previous authorization, the company had about $89.6 million shares available for buybacks at the end of 2014.
Guidance
Concurrently, CBOE Holdings detailed its outlook for 2015. Core operating expenses are estimated in the range of $195–199 million in 2015, up 3–5% from $188.9 million recorded in 2014. Depreciation and amortization expenses are likely to be in the $46–48 million band.
Continuing stock-based compensation expenses, included in core expenses, are expected to be about $12 million in 2015. Meanwhile, the effective tax rate will likely be within 38.5–39.5%. Capital expenditure is projected in the range of $37–40 million.
Dividend Update
On Feb 4, 2015, the board of CBOE Holdings declared a regular quarterly dividend of 21 cents per share, payable on Mar 20, 2015, to shareholders of record on Feb 27.
On Dec 19, 2014, the company paid a regular quarterly dividend of 21 cents per share to shareholders of record as on Nov 28. This was raised by 17% from the prior payout of 18 cents in Jul 2014.
Market Reaction
Nevertheless, shares of CBOE Holdings fell 4.1% on Friday, closing at $62.46, based on lower-than-expected earnings report. The negative market reaction is also partly attributable to the ongoing fall in CBOE Volatility Index, also reflected in the company’s tepid volumes report for Jan 2015, casting a cautious outlook going forward.
CBOE Holdings carries a Zacks Rank #3 (Hold).
Stocks that Warrant a Look
Better-ranked financial stocks likeMarketAxess Holdings Inc. (MKTX), Ladder Capital Corp (LADR) and JMP Group LLC (JMP), all sporting a Zacks Rank #1 (Strong Buy), are worth considering.
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