CBOE Global Markets (CBOE): Bull Case Summary

We came across a bullish thesis on CBOE on Valueinvestorsclub by GLSV. We follow VIC very closely as the ideas are usually posted by aspiring analysts, who tend to optimize their skills to the fullest. We find the ideas presented on the site well-thought out and worth checking. You can read the full article here. Here is the brief summary:

Holding company for The Chicago Board of Options Exchange (one of the largest options exchanges in the world, and the largest in the US) CBOE has been the dominant U.S. options exchange for decades. CBOE enjoys exclusivity with its core products like the options of the S&P 500 and the proprietary VIX. The acquisition of  Better Alternative Trading System (BATS) in 2017 has given the company added edge in the US and European equities, and global forex business. Although the revenue mix now covers broader asset classes yet options remains the largest slice of the overall revenue pie.

Some of the exclusive licenses CBOE has either recently signed or renewed include agreement with MSCI, FTSE Russell, and S&P Global, among others. These have further enhanced the company’s ability to maintain the dominant position in the market. The influential position has helped CBOE  manage the competition from its peers such as CME (Chicago Mercantile Exchange) rather well.

Softness in some product segments seen recently are pandemic related wherein institutional volumes have somewhat shrunk due to their low participation. Some are inherently volatile due to their characteristics. VIX futures is one such example, wherein participation has always seen wide swings.

With no seriously adverse backdrops, the company is poised to gain from its ongoing transformation from a transaction platform to multi-dimensional exchange encompassing traditional as well as non-transactional verticals. BATS’ state of the art technology has played a pivotal role in this transformation, giving a big boost to the company’s revenue base. BATS has the capacity to further integrate the various business segments, build high quality research and data platform, provide seamless executions on global exchanges, and yet reduce cost.

A low debt company, CBOE has room to further leverage its balance sheet to secure more business expansion deals globally. But, it has to primarily grow organically and maintain risk-mitigations strategies. Primary risks include lower trading volumes in proprietary and/or exclusive products and unfavourable regulatory changes (pricing etc.).

The stock is trading at a discount to its forward EPS and EBITDA, which is contrary to its historical record of enjoying a premium. A well-managed dominant player, CBOE seems to have missed investors’ attention, probably, due to low revenue growth expectations.