Cboe Global (CBOE) Banks on Acquisitions, Cost Woes Stay

Cboe Global Markets CBOE is poised for growth on strategic acquisitions, higher volumes and effective capital deployment, partly offset by high costs.

The company has a favorable VGM Score of B. VGM Score helps to identify stocks with the most attractive value, best growth and the most promising momentum.

The company has a decent earnings surprise history. The company beat estimates in each of the last four quarters with the average surprise being 8.04%.

The stock has seen its estimates for 2020 and 2021 move up nearly 0.2% and 0.4%, respectively in the past 30 days, reflecting investor optimism.

Why Should You Retain the Stock?

Cboe Global continues to benefit from higher revenues driven by higher transaction fees, access and capacity fees, market data fees, regulatory fees, and other revenues across the company’s segments. Revenues increased at a five-year (2014-2019) CAGR of 32.3%.

The company’s segments should benefit from higher market volumes in Options, U.S. Equities and Futures, increase in options market ADV, U.S. Equities market ADV, Futures ADV, increase in logical port units in the Options and European Equities segments, increase in subscribers on Cboe Options and the U.S. Equities exchanges, higher index licensing and trade reporting services revenues, which are expected to drive revenues in the days ahead.

The Zacks Consensus Estimate for the company’s 2020 revenues is pegged at $1.2 billion, indicating an increase of 9.5% from the year-ago reported figure.

The company pursues acquisitions to strengthen its business. In the third quarter of 2020, it completed the acquisition of leading pan-European equities clearing house, EuroCCP which is expected to boost the European equities business of Cboe Global as well as leverage the strength of its pan-European network, and pursue the development of derivatives trading and clearing capabilities in the European equities business region.

It also acquired leading Canadian alternative trading system (ATS) MATCHNow in the third quarter of 2020, which is expected to help the acquirer gain a foothold in a key capital market and to build on a comprehensive equities platform for the Canadian market.

It further plans to launch futures and options on six key European equity indices in the first half of 2021 and looks forward to providing an alternative market model to enhance the overall trading ecosystem.

Cboe Global also reported impressive volumes for the month of August. Its average daily volume (“ADV”) of 9.7 million contracts increased 10.7% year over year, driven by 13.3% higher Options contracts. Total contracts for the month increased 5.7% year over year.

Furthermore, investors should be impressed by its stellar record of 10 straight years of dividend increases. The company has increased its dividend at a six-year (2014-2020) CAGR of 15.2%. Its current dividend yield of 1.9% is higher than the industry average of 1.5%, which makes the stock an attractive pick for yield-seeking investors. It has $329.9 million remaining under its share repurchase program.

Moreover, return on equity (ROE), reflecting the company’s efficient utilization of its shareholders’ funds to generate earnings, has been increasing over the past several years. Its trailing twelve months ROE of 18.2% betters the industry average of 12.3%.

However, shares of this Zacks Rank #3 (Hold) futures exchange have lost 22.3% in the past year against the industry’s increase of 1.3%.

Also, the company has been witnessing rising expenses, which tend to weigh on the company’s margins. Notably, in the second quarter, net margin contracted 90 basis points year over year. For 2020, adjusted operating expenses are projected in the range of $436 million to $444 million, up from $419-$427 million expected earlier.

Nonetheless, the Zacks Consensus Estimate for 2020 earnings per share is pegged at $5.20, indicating year-over-year increase of nearly 9.9%.

Stocks to Consider

Some better-ranked stocks from the finance sector include Moody’s Corporation MCO, OTC Markets Group Inc. OTCM and MoneyGram International Inc. MGI, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Moody’s surpassed estimates in each of the last four quarters, with the average beat being 13.81%.

OTC Markets surpassed estimates in three of the last four quarters, with the average earnings beat being 10.54%.

MoneyGram surpassed estimates in two of the last four quarters, with the average earnings surprise being 14.77%.

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