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Although financials continue to lead the market higher, newer segments are taking the reins in Q2. In addition to smaller regional banking institutions, many investors are seeing solid performances out of firms in the exchange business, such as CBOE Holdings (CBOE - Analyst Report).
While probably less famous than fellow Chicago-based exchange CME Group (CME - Analyst Report), CBOE has been soaring higher for much of 2013 as demand for listed options on securities remains strong. This is especially true in two of the company’s key products; options and futures on the CBOE Volatility Index as well as the S&P 500 Index.
Both of these benchmarks are widely followed by traders and investors alike, and the CBOE’s monopoly position on futures and options trading for these two indexes have been increasingly lucrative. In fact, trading in CBOE index options was up 28% from a year earlier in the recent quarterly release, and these index-based contracts now make up nearly 38% of total trades for the firm.
Given the firm’s nearly unassailable position in these key markets and the high investor demand for the index-based products, good days could continue to be ahead for the company. That is why many analysts have been raising their estimates for CBOE, helping to push the company to a top Zacks Rank of 1 or ‘Strong Buy’.
The current quarter estimate picture has been rising, while investors have also seen analysts bump up their current year and next year forecasts for the company as well. Furthermore, there has actually been total agreement on this front, as all new estimates in the past two months have been up with not a single one going lower.
Investors should also note that while expectations might be elevated, the company has beaten out estimates every time in the past four quarters, producing an average surprise of roughly 7.6%. This suggests that the company has no trouble matching high expectations, with big beats being the norm for CBOE.
If that wasn’t enough for investors, it is also worth noting that many analysts are still baking in sizable growth for the firm going forward. Double digit earnings growth (year-over-year) is projected for the current year and next year periods, while the PE is below 20 and the PEG is below 2, meaning that the firm is still a decent value despite the abundant opportunities for growth present for the firm.
This impressive earnings picture is enough to put the CBOE into elite company with a Zacks Rank of 1. However, it is also worth noting that the firm has good company even in its own industry, as the securities exchanges group is currently ranked 75 out of 261 meaning that the industry also has a pretty favorable estimate picture as well.
CBOE is also doing a great job from a profitably standpoint as well. In particular, the net margin is over 30%, while the ROA and ROE are, respectively, 46% and 65%, implying a pretty high level of profitability for the firm.
Lastly, it is important to once again highlight the monopoly like position the company has in the index option market. While many of its competitors have tried to break into this space, they have so far been unsuccessful meaning that the CBOE has tremendous pricing power for these key products.
CBOE is clearly deserving of its top rank, as analysts are in total agreement about the rosy future of the company. After all, the company has a solid financial position and tremendous profitability, leaving it in a great spot going forward.
So if you are looking for a great pick in the financial world, consider CBOE for exposure. It pretty much has a monopoly on two of its key products, and these instruments are only increasing in importance, suggesting that more revenues—and higher earnings—could be ahead for this often-overlooked company.
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