Our look at the CBOE IPO concludes with a mostly positive view on the company and the deal. The only real sticking point is that the proposed pricing doesn’t leave much – if anything – on the table for investors in the short term.
But it’s a quality name that will be paying a dividend and may be able to exceed some of the forecasts that drive the valuation model. Until the dust settles we’d be a very price sensitive buyer of CBOE.
A snapshot diagram of the analysis and some brief comments are included here.
- Market: Very large and growing thanks to increased use of index options and other risk management tools.
- Position: The CBOE has strong market share and agreements with index owners (like S&P) which help protect their business.
- Industry: Industry trends are favorable (more volume in general and an increasing proportion of it is CBOE-related) but rivalry is fairly high leading to intense competition. This is one of the reaons that CBOE has to invest in a large processing center outside of NYC. Although the point can be argued, we are putting the government down here as a NA.
- Business: The CBOE enjoys a very attractive business model which has been yielding net margins of 25%. Although investments in technology and innovation are required, it’s a captial efficient structure given the margins. The only disappointment is the rather high 40% tax rate which is difficult to reduce given the local scope of operation.
- Management: The management team is very experienced, has been together a long time, and have tackled some difficult transitions already.
- Culture: The company appears to have been able to preserve their roots as an open outcry exchange and yet grow into a company at least comfortable with, and possibly relishing, change and innovation.
- Valuation: Unfortunately, the company and their lead manager have done their homework on valuation. There isn’t any money being left on the table given the $28 mid-point of the filing range. Our base case IV comes to $27.47. It’s possible that the company may sustain higher revenue growth after their NY operation (C2) comes online late in 2010. But even dialing in better top-line growth brings our IV only to $30. (Note these figures are using a 25x P/E multiple.)CBOE will be paying a healthy dividend based on a percentage of their operating profits so this stock will appeal to more yield/long-term holders at these prices.UPDATE: now on IPOIQ.
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