On Apr 21, 2015, Zacks Investment Research downgraded CBOE Holdings Inc. CBOE by a notch to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Estimate revisions for CBOE Holdings have been trending downward owing to sluggish volumes so far this year. Lack of any significant growth catalyst, muted volatility, regulatory challenges and stiff competition further raise concerns on the growth outlook going forward.
Most significantly, trading volumes continue to pose a fluctuating trend over the past several quarters. This is primarily due to extreme market complacency posed by the CBOE volatility index (VIX), which accounts for maximum volumes generation. While VIX is based on implied volatility, it largely impacts the dynamics of derivative markets.
The fluctuations are evident from average daily volumes that rose merely at a 4-year (2009–2013) CAGR of 1.1%, reflecting declines in 2009, 2010 and 2012. While improvement was witnessed in 2013 and continued through most of 2014, average daily volumes weakened significantly in second-quarter 2014 and plunged 17% in first-quarter 2015.
The ongoing underperformance also highlights adverse effects of askew underlying forces and seasonality issues, thereby escalating operational and financial risks.
Reduction in the prepayments of transaction fees along with lower deferred revenues and other liabilities alsopose financial risks. Hence, we do not foresee any radical top-line growth unless the current market recovery renders resonance to liquidity and credit quality.
Additionally, this U.S. derivative exchange underperformed the six-month Nasdaq index, which posed growth of 13.4% against mere 1.9% clocked by the company. CBOE Holdings also missed the Zacks Consensus Estimate of 66 cents by posting earnings of 64 cents in fourth-quarter 2014.
Meanwhile, the Zacks Consensus Estimate for 2015 and 2016 declined 7.5% and 6.8% to $2.22 and $2.60 a share, respectively, in the last 30 days. No upward estimate revision was witnessed for both these years. Even on year-over-year basis, earnings are expected to drop 2.7% in 2015.
Moreover, the Most Accurate estimate for CBOE Holdings’ 2015 and 2016 earnings currently stand at $2.17 and $2.54 a share, resulting in an Earnings ESP of -2.25% and -2.31%, respectively. This further reflects a sluggish growth momentum.
Other Worthy Financial Stocks
While we prefer to avoid CBOE Holdings for the time being, better-ranked financial stocks like MarketAxess Holdings Inc. MKTX, Investment Technology Group Inc. ITG and Brookfield Asset Management Inc. BAM are worth considering. All these stocks sporta Zacks Rank #1 (Strong Buy).
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