CBOE (CBOE) Up 3.3% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for CBOE Holdings (CBOE). Shares have added about 3.3% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is CBOE due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Cboe Global's Q3 Earnings and Revenues Beat Estimates

Cboe Global Markets’ third-quarter 2019 adjusted earnings of $1.29 per share beat the Zacks Consensus Estimate by 11.2%. Moreover, the bottom line increased 22% year over year on higher trading volumes.

Operational Details

Total revenues came in at $294 million, beating the Zacks Consensus Estimate by 1.4%. Moreover, the top line increased 9% driven by higher trading volume in proprietary products, including SPX options, VIX options and futures, as well as growth in market data revenues.

Options revenues increased 10% driven by higher revenues from net transaction fees. Total options average daily volume (ADV) increased 15% while revenue per contract (RPC) declined 3%.

Revenues of U.S. Equities increased 6% on higher market data revenues from the industry tape plan, which included audit recoveries of $4.3 million. Futures revenues increased 28% driven by higher net transaction fees.

However, European Equities revenues declined 7%, reflecting a decline in net transaction fees, partially offset by a slight increase in non-transaction revenues.

Global FX revenues declined 4% due to lower net transaction fees.
Total adjusted operating expenses decreased 3% year over year to $96.5 million. The decline was attributable to a decrease in compensation and benefits as a result of lower incentive-based compensation.
Adjusted operating margin in the quarter under review was 67.2%, up 380 basis points (bps), reflecting higher net revenues and lower expenses.

Adjusted EBITDA margin of 70.9% expanded 380 bps.

Financial Update

As of Sep 30, 2019, CBOE Global had cash and cash equivalents of $150 million, down 45.5% from the figure at 2018 end. Total assets were $5.1 billion in the third quarter, down 5.7% from the level at 2018 end.

At the end of the third quarter, long-term debt was $867.1 million, down 5.3% year over year. The company deployed $50 million to pay a term loan, lowering the leverage ratio to 1.1 as of Sep 30 from 1.2 as of Jun 30, 2019.

Total shareholders’ equity was $3.3 billion at the end of the reported quarter, up 2.7% from the value on Dec 31, 2018.

Share Repurchase and Dividend Update

The company paid out cash dividends worth $40.4 million or 36 cents per share in the third quarter.

The company also bought back 0.5 million shares for $52.4 million. On Oct 30, 2019, the board of directors increased its share repurchase authorization by $250 million.

2019 Guidance

Adjusted operating expenses are now expected between $390 and $395 million, down from the previous estimate of $405-$413 million.

Capital expenditures are now projected in the range of $35-$40 million, down from the prior band of $50-$55 million, indicating a shift in the timing of expenditures associated with the company's Chicago headquarters relocation.

Depreciation and amortization expense is reiterated between $35 million and $40 million.

The effective tax rate on adjusted earnings for 2019 is expected between 25.5% and 27.5%, down from the previous range of 27% to 29%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

Currently, CBOE has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, CBOE has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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