CBOE Global Markets Offers Reliable Growth

A subscriber asked me about CBOE Global Markets this week. CBOE came public in 2010, and has done exceedingly well since. CBOE posted excellent growth across all major metrics. Continuous shareholders were well rewarded. The share price and total return actually slightly exceeded EPS increases since the IPO. The outsized jump in book value per share came via a well-timed secondary offering during 2017, which was very accretive to BV. Likewise, the 579%, 2010 to 2018, jump in dividends reflected only a partial year of distributions during 2010. Substantial long-term growth covers a multitude of investing sins. Buyers shortly after CBOE's 2010 IPO paid way too high a valuation. The stock's early $34.20 peak, at 33.2x forward EPS, preceded a four-month drop to just $19.60. Ouch. Nice profit growth and sideways action allowed later investors to get into CBOE for just 14x to 15x current year's earnings during 2011 through 2013 (green-starred below). While post-IPO buyers eventually made out well, they suffered through about 2.5 years of pain just getting back to even. Valuation surges in late 2014 and 2015 once again pushed CBOE back up to near 30x earnings. Not surprisingly, the stock proceeded to go sideways to down for long periods working off that frothiness. Early this year we got yet another repeat performance. CBOE ran quickly to $138.50, or 30.1x this year's consensus estimate. As of Oct. 8, 2018, the shares had retreated to under $100. Clearly, even a great company can see its shares become too hot to hold, for all but the most patient traders. From 2010 through 2017, CBOE averaged about 22.9x earnings while paying just below 1.5% in dividends. CBOE's best entry points (green-starred) almost always reflected a lower than average P/E accompanied by higher than typical yield. How does CBOE stack up right now on valuation? Its multiple appears slightly discounted while its yield is a bit sub-par. Fair value, based on CBOE's 2018 estimate might be around $105. Reverse engineering the current 31-cent quarterly payout to 1.49% suggests $83 as normal. That goes a long way towards understanding independent research firm Morningstar's neutral rating on CBOE. Their present-day fair value estimate falls almost exactly midway between my own calculated numbers. If the company can deliver the expected growth for 2019 a 16-month target of $111 seems quite appropriate. If 12% - 13% total return by the end of 2019 is appealing then CBOE shares might be an okay choice right now. Worst-case risk, in the form of a severe market pullback, would likely be having to wait longer than expected to see upward movement. Traders interested in playing CBOE might want to consider selling some in-the-money, long-term put options on CBOE. Premiums of $13.60 and $18.60 were recently available on the Jan. 15, 2021 expiration date $100 and $110 strike prices respectively. Those dropped worst-case, forced purchase prices down to just $86.40 or $91.40. Better still, the long expiration almost assures that CBOE will ramp up EPS and dividend growth in the ensuing 27-months through January of 2021. CBOE's 95th percentile price growth persistence suggests an even wider margin of safety than indicated. Future stock market action can never be guaranteed. That said, it's worth noting that owning CBOE at a net cost of $86.40, the break-even on the $100 put shown above, would have been a winning position 100% of the time dating back more than a full year. Maximum profit on that option sale, or any other for that matter, equals 100% of the premium collected up front. That equals $1,360 per 100-share commitment in this example. Even great companies can see poor share price movement when their stock is too expensive. If you must play... consider using long-term put sales to both lock in lower entry points and to take up the time needed for the valuation to catch up to the fundamentals. All the principles illustrated here can be applied to other, similarly positioned, stocks that you might have an interest in.

CBOE Global Markets Offers Reliable Growth

If the company can deliver its expected growth for 2019, a 16-month target of $111 seems quite appropriate.

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