The CBOE Holdings, Inc (NASDAQ:CBOE) is also seeing impressive gains with a new line of weekly contracts linked to its high volume and extremely popular S&P 500 INDEX (INDEXCBOE:SPX) contract. Through July, trading volume in the weekly SPX contracts was up 147% from last year, now accounting for 25% of total SPX revenue as opposed to just 15% in 2012 and 9% in 2011. CBOE has noted that growing interest from retail investors has fueled the popularity of the weekly expirations, and has plans to launch a new daily contract that should provide stimulus for additional volume and revenue growth.
The recent string of earnings growth has strengthened the CBOE’s financial profile. It has cash and equivalents of $208 million with no long-term debt. That led CBOE to increase its dividend by 20% last year to 18 cents, yielding 1.4%. It will also support additional shareholder value, with $100 million remaining on the board’s $200 million share repurchase program.
The CBOE could also be an acquisition or merger target. The financial exchange industry has gone through a massive wave of consolidation in the past five years that is still in play. The CBOE’s options business would be a highly attractive diversification strategy for an international futures or equity exchange.
The encouraging outlook has the consensus estimate calling for 19% earnings growth in 2013, 16% earnings growth in 2014 and 13% annual earnings growth in the next five years.
Risks to Consider: CBOE has been surging in 2013, with shares up 61% in the past seven months. Although the valuation still looks reasonable, that gain has not been accompanied by equal earnings or projected earnings growth. A pullback could trigger a wave of profit-taking.
Action to Take –> The CBOE is benefiting from growing interest and trading volumes in options, lifting shares to a 61% gain in 2013. But with high margins, barriers to entrance and a strong financial profile this is also a company to own for the long haul. With a forward P/E (price-to-earnings) ratio of 24, in line with its peers but a premium to its higher-growth 10-year average, shares look a bit extended in the short run, making any weakness a chance to buy.
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The article The Easiest Way To Profit From The ‘Options Boom’ originally appeared on StreetAuthority and is written by Michael Vodicka.
