Rating Update: Stock Rating C-Neutral (4/9/20)-Cboe Global Markets Inc (CBOE).

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BUSINESS

Cboe Global Markets, Inc., through its subsidiaries, operates as an options exchange in the United States. The company operates in five segments: Options, U.S. Equities, Futures, European Equities, and Global FX. The Options segment trades in listed market indexes. The U.S. Equities segment trades in listed cash equities; and provides exchange-traded products (ETP) transaction and ETP listing services. The Futures segment trades in futures, bitcoins, and other products. The European Equities segment trades in pan-European listed equities transaction services, ETPs, exchange-traded commodities, and international depository receipts. The Global FX segment provides institutional foreign exchange (FX) and non-deliverable forward FX transactions services.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be above the cost of capital, CBOE is expected to continue to be a Value Builder.

Cboe Global Markets has a current Value Trend Rating of C (Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing very contradictory signals. Cboe Global Markets has a poor Appreciation Score of 29 but a good Power Rating of 70, triggering the Neutral Value Trend Rating.

Cboe Global Markets’ stock is selling at targeted value. The current stock price of $93.42 compares to targeted value 12 months forward of $94.
This low appreciation potential results in an appreciation score of 29 (71% of the universe has greater appreciation potential.)
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Cboe Global Markets has a Power Rating of 70. (CBOE’s good Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 30% of companies in the universe.)
Factors contributing to this good Power Rating include: is in a strong phase current; the recent trend in CBOE’s earnings estimates has been favorable; and recent price action has been neutral.

INVESTMENT PROFILE

CBOE’s financial strength is exceptional. Financial strength rating is 100.
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Relative to the S&P 500 Composite, Cboe Global Markets Inc has neutral Growth/Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that CBOE is extremely low risk. All factors are relative strengths. CBOE’s valuation is moderate: moderate dividend yield, moderate P/E ratio, and moderate price/book ratio. CBOE has low market capitalization.

CURRENT SIGNALS

Cboe Global Markets’ current operations are eroding. Return on equity is falling, reflecting: and falling tax keep rate.

Cboe Global Markets’ current technical position is very weak. The stock price is in a 1.2 month down move. The stock has declined 26.8% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

The stock is currently rated C.
Cboe Global Markets Inc (BATS: CBOE) stock enjoyed a major increase of 10.6% on 4/9/20. The shares closed at $29.59. Moreover, above average trading volume at 131% of normal accompanied the advance. The stock has risen 5.9% during the last week and has performed in line with the market over the last nine months.

CASH FLOW

In 2019, Cboe Global Markets experienced a decrease in cash of -$10.5 million (-3%). Sources of cash were very modestly less than uses. Cash generated from 2019 EBITDA totalled +$785.7 million. Non-operating uses consumed -$66.3 million (-8% of EBITDA). Cash taxes consumed -$167.7 million (-21% of EBITDA). Withdrawal of investment from the business totalled +$27.8 million (+4% of EBITDA). On a net basis, debt investors withdrew -$330.2 million (-42% of EBITDA) while equity investors pulled out -$259.8 million (-33% of EBITDA).
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Cboe Global Markets’ Non-operating Income, %EBITDA has experienced a small downtrend over the period. This downtrend was accompanied by stability for the Cboe Global Markets Inc Peer Group. In most years, Cboe Global Markets was in the second quartile and third quartile. Currently, Cboe Global Markets is below median at -8% of EBITDA (-$66.3 million).

Cboe Global Markets’ Cash Taxes, %EBITDA enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Cboe Global Markets Inc Peer Group. In most years, Cboe Global Markets was in the lower quartile and top quartile. Currently, Cboe Global Markets is lower quartile at -21% of EBITDA (-$167.7 million).

Cboe Global Markets’ Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Cboe Global Markets Inc Peer Group. (Since 2017 Business Re-investment, %EBITDA has experienced a very sharp recovery.) In most years, Cboe Global Markets was in the top quartile and second quartile. Currently, Cboe Global Markets is upper quartile at +4% of EBITDA (+$27.8 million).

Cboe Global Markets’ Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Cboe Global Markets Inc Peer Group. (Since 2017 Debt Investors, %EBITDA has experienced a very sharp decline.) In most years, Cboe Global Markets was in the second quartile and top quartile. Currently, Cboe Global Markets is lower quartile at -42% of EBITDA (-$330.2 million).

Cboe Global Markets’ Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Cboe Global Markets Inc Peer Group. In most years, Cboe Global Markets was in the third quartile and lower quartile. Currently, Cboe Global Markets is below median at -33% of EBITDA (-$259.8 million).

Cboe Global Markets’ Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by stability for the Cboe Global Markets Inc Peer Group. In most years, Cboe Global Markets was in the second quartile and top quartile. Currently, Cboe Global Markets is substantially below median at -1% of EBITDA (-$10.5 million).
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Cboe Global Markets’ Cash, %Revenue has experienced a minor downtrend over the period. This downtrend was accompanied by a similar trend for the Cboe Global Markets Inc Peer Group. (Since 2017 Cash, %Revenue has experienced a sharp recovery.) In most years, Cboe Global Markets was in the third quartile and second quartile. Currently, Cboe Global Markets is at the lower quartile at +12%.

PROFITABILITY

Cboe Global Markets’ return on equity reached a new post-2010 low in 2019.
This was due to very strong negative trend in pretax operating return offset by very strong positive trend in non-operating factors.
The productivity of Cboe Global Markets’ assets declined over the full period 2010-2019: asset turnover has suffered a very strong overall downtrend even as it experienced a sharp recovery after the 2017 low.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend but it experienced a very sharp recovery after the 2017 low.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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Cboe Global Markets’ return on equity is below median (11.2%) for the four quarters ended December, 2019.
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Operating performance (pretax return on assets) is above median (9.8%) reflecting asset turnover that is at median (0.49X) and above median pretax margin (20.1%).
Tax “keep” rate (income tax management) is at the lower quartile (74.7%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is at the lower quartile (1.52X).

GROWTH RATES

Overall, Cboe Global Markets’ growth rate has slowed very considerably in recent years.
Cboe Global Markets’ historical income statement growth has been lower than balance sheet growth. Revenue growth has fallen short of asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 19.7% per year.

Total asset growth has been 39.1% per year. (More recently it has been -0.6%.)

Annual E.P.S. growth has been 14.5% per year.

Equity growth has been 37.5% per year. (More recently it has been 3.3%.)

Cboe Global Markets’ consensus growth rate forecast (average of Wall Street analysts) is 6.3% — substantially below the average of the historical growth measures.
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Relative to the Cboe Global Markets Inc Peer Group, Cboe Global Markets’ historical growth measures are consistently top quartile. Revenue growth (19.7%) has been upper quartile. Total asset growth (39.1%) has been upper quartile. E.P.S. growth (14.5%) has been upper quartile. Equity growth (37.5%) has been upper quartile.

In total contrast, consensus growth forecast (6.3%) is lower quartile.
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PRICE HISTORY

Over the full time period, Cboe Global Markets’ stock price performance has been quite good. Between July, 2010 and April, 2020, Cboe Global Markets’ stock price rose +251%; relative to the market, this was a +39% gain. Significant price move during the period: 1) July, 2011 – January, 2018: +483%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -5.3% is above median relative to the S&P 500 Composite.
In addition to being above median relative to S&P 500 Composite, current annual total return performance through March, 2020 of -5.3% is below median relative to Cboe Global Markets Inc Peer Group.

Current 5-year total return performance of 10.6% is substantially above median relative to the S&P 500 Composite.
Through March, 2020, with substantially above median current 5-year total return of 10.6% relative to S&P 500 Composite, Cboe Global Markets’ total return performance is above median relative to Cboe Global Markets Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, CBOE’s overall valuation is high. The highest factor, the ratio of enterprise value/assets, is near the upper quartile. Ratio of enterprise value/revenue is above median. Price/earnings ratio is near the upper quartile. Ratio of enterprise value/earnings before interest and taxes is above median. The lowest factor, the price/equity ratio, is slightly above median.
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Cboe Global Markets has a very large value gap compared to median valuation. For CBOE to fall to lower quartile valuation, its current ratio of enterprise value/revenue would have to decline from the current level of 4.36X to 3.03X. If CBOE’s ratio of enterprise value/revenue were to decline to 3.03X, its stock price would be lower by $-30 to $63.
For CBOE to achieve upper quartile valuation relative to the Cboe Global Markets Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 4.36X to 6.55X. If CBOE’s ratio of enterprise value/revenue were to rise to 6.55X, its stock price would increase by $50 from the current level of $93.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be above the cost of capital, CBOE is expected to continue to be a Value Builder.
Cboe Global Markets’ current Price Target of $96 is little changed from the current price of $93.42.
This low appreciation potential results in an appreciation score of 29 (71% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 29, the high Power Rating of 70 results in an Value Trend Rating of C.
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Cboe Global Markets’ current Price Target is $96 (+11% from the 2019 Target of $87 and +3% from the 04/09/20 price of $93.42). This slight rise in the Target is the result of a +23% increase in the equity base and a -10% decrease in the price/equity multiple. The forecasted decline in return on equity has a large negative impact on the price/equity multiple and the forecasted increase in cost of equity has no negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a slight positive impact.
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PTR’s return on equity forecast is 13.4% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2011 and 2019. The current forecast is significantly below the 2014 peak of 76%.

PTR’s growth forecast is 13.0% — in line with our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2011 and 2019. The current forecast is well above the 2012 low of 4%.

PTR’s cost of equity forecast is 9.4% — in line with recent levels. Forecasted cost of equity exhibited a slight, erratic decline between 2011 and 2019. The current forecast is steady at the 2011 peak of 9.9%.
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At Cboe Global Markets’ current price of $93.42, investors are placing a positive value of $35 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 11.0% per year, and a return on equity of 14.7% versus a cost of equity of 9.4%.
PTR’s 2021 Price Target of $96 is based on these forecasts and reflects an estimated value of existing assets of $59 and a value of future investments of $37.

About John Lafferty 91533 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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