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.

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  • 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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2 Comments

  1. landshark on 06/09/2010 at 9:09 am

    Barrons does have a good writeup of the company. The link is below although it requires subscription.

    https://online.barrons.com/article/SB127508610600498253.html

  2. CBOE Pricing Desk on 06/15/2010 at 5:21 pm

    The CBOE’s highly anticipated IPO priced at $29 per share — the upper end of the expected range of $27-29 — and the stock will begin trading on the Nasdaq later this morning. While the timing of the IPO isn’t great, the CBOE is a clear leader in the options exchange business, and the company has been positioning itself for an IPO for quite some time. The highest earnings/revenue growth took place back in the 2005-2006 period, but CBOE’s growth rates are expected to pick up again over the next few years and the options market growth should continue to outpace traditional equities. Although the options market is growing, so is competition, with CBOE’s market share slipping as a result (market share of U.S. options volume fell from 45% in 2000 to 31% in 2009). CBOE’s exclusive rights to several index products are a clear competitive advantage, but also represent a risk if that exclusivity is lost, and legal disputes around this matter remain ongoing. This exclusive licenses also add to CBOE’s attractiveness as an M&A candidate.

    The exchange will raise ~$340 million through an 11.7 million share offering. Since the CBOE is a member-owned exchange, seat holders will get a large portion of the proceeds. Based on the $29 price and on 102.6 million shares outstanding following the deal, the market capitalization would be roughly $3.0 billion. Based on the $29 price, CBOE’s valuation on a P/E basis would be 27.9x last year’s EPS. This compares to the group average of 16x, and an average of 24x for derivatives exchanges CME and ICE. Looking ahead (using the single analyst estimate), CBOE’s opening price represents a P/E of 22.5x the single estimate, vs. a group average of ~14x and CME/ICE average of ~20.

    The CBOE IPO will be highly watched and should act as a barometer for the market’s appetite for new deals. CBOE’s debut could also put a spotlight back on the exchange sector, with the potential for secondary moves in other exchange stocks CME, ICE, NDAQ and NYX.

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