After more than 25% gains from the lows of March 23 of last year, at the current price of $ 96 per share, we believe CBOE Global Stock (BATS: CBOE) has some leeway. CBOE Global, one of the world’s largest equity portfolio companies providing trading and investing solutions to investors, saw its stock drop from $ 77 to $ 96 from last March low against the S&P which has traded around 75% – the stock lags the largest markets by a huge margin and has fallen by 22% over the past twelve months. However, there is a lag between its inventory movements and revenue growth – CBOE’s revenue grew 37% to a consolidated figure of $ 3.43 billion in the past 4 quarters. Revenue growth was driven by higher clearing and transaction fees, primarily due to higher trading volumes in the options segment. This spike in trading volumes is expected to normalize in the coming months. Therefore, investors are cautious about the growth prospects of CBOE.
CBOE Global’s stock has partially reached where it was before the decline in February 2020 due to the coronavirus outbreak turning into a pandemic. Despite some rise from the March 23 low, we believe the company’s stock still has potential, as its valuation implies that it still has some way to go.
The company’s total revenues increased by approximately 54%, from $ 2.2 billion in 2017 to approximately $ 3.4 billion in 2020, resulting in a 17% increase in net income . The difference in growth figures is mainly due to a jump in the cost of revenue from 55.3% in 2017 to 63.4% in 2020. On a net revenue basis (revenue minus cost of revenue), CBOE grew by 26% over the same period.
Although the company experienced steady growth in revenue and profit over 2017-2020, its P / E multiple declined. We believe the stock is undervalued and should see some upside despite recent growth and the potential weakness of a recession triggered by the Covid outbreak. Our dashboard Buy or fear the global action of the CBOE? has the underlying numbers.
CBOE Global’s P / E multiple has grown from just under 34x in 2017 to around 22x in 2020. While the company’s P / E is close to 23x now, there is an advantage when the P / Current E is compared to levels seen in recent years – P / E multiple of around 26x at the end of 2018 and 34x at the end of 2017.
So where is the action headed?
CBOE Global operates the largest options exchange in the United States. Its net income for 2020 grew 10% year-on-year, mainly due to increased trading volumes in the options segment – the average daily option volume (“ADV”) increased 41% year-on-year in the fourth quarter. The company generates the majority of its revenue from transaction and clearing fees, which are charged per transaction. Therefore, higher commercial activity benefited the CBOE frontline. Economic uncertainty due to the Covid-19 crisis has resulted in increased market volatility in 2020. The same situation is expected to improve over the following quarters with the massive availability of the Covid-19 vaccine and the resumption of economic conditions. In addition, it is likely to normalize trading volumes which will negatively impact CBOE revenues. That said, given its strong fundamentals, we believe that CBOE Global stock may experience some growth in the near term.
Actual recovery and its timing depend on wider containment of the spread of the coronavirus. Our dashboard Trends in Covid-19 cases in the United States provides insight into the spread of the pandemic in the United States and contrasts with trends in Brazil and Russia. Following the Fed’s stimulus – which set a floor on fear – the market was ready to “look through” the current period of weakness and take a longer-term view. With investors focusing their attention on the 2021 results, valuations become important in finding value. Although market sentiment may be volatile, and evidence of a rise in new cases could scare investors again.
While Global Equities CBOE may move, 2020 has created many price discontinuities that may provide some interesting trading opportunities. For example, you will be surprised at how the valuation of stocks for Walmart vs. World Wrestling Entertainment shows a disconnect with their relative operational growth. You can find a lot of them discontinuous pairs here.
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