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Bull of the Day: Cboe Global Markets (CBOE)

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Cboe Global Markets (CBOE - Free Report) is the $13.6 billion center of U.S. equity options trading, averaging over 11.4 million contracts per day.

And the value of its U.S. stock transactions exceeds $61 billion per day.

CBOE is also the home of the Volatility Index, aka "the VIX." This calculation of "the price of risk" for the market is derived from the implied volatility of S&P 500 (SPX) options, which are still traded in a giant, raucous "pit" there.

Where Does the VIX Come From?

SPX options were designed as an institutional hedging product in the early 1980s. While much volume has moved to electronic platforms in the past few years, the pit still provides important liquidity and price discovery in an "open outcry" auction market.

There, numerous "local" traders all compete to buy and sell calls and puts as large and often sophisticated, multi-leg hedging orders come to the trading floor during regular stock market hours.

Since put options are like proxies for buying insurance on the stock market, when worry and fear among institutional portfolio managers are increasing, puts are in high demand and this raises their prices.

By asking the Black-Scholes options pricing model what a basket of SPX options prices is implying about expected moves in the market (usually downward), it can reverse engineer a future volatility estimate.

Thus the continuously calculated VIX becomes labeled the "fear gauge" for short.

EPS Bumps Push CBOE to a Zacks #1

CBOE shares moved to the upper tiers of the Zacks Rank after the company reported strong results and a solid outlook in early November.

After that report and optimistic guidance, analysts raised full-year EPS estimates 4.5% from $6.49 to a consensus of $6.78.

More impressively, the 2023 EPS consensus jumped 5.6% from $6.62 to $6.99.

Quarter Details

Third-quarter 2022 adjusted earnings of $1.74 per share beat the Zacks Consensus Estimate by 6.8%. This result saw the bottom line increase 20% year over year.

The quarter witnessed record net revenues and adjusted earnings, courtesy of a robust derivatives franchise, supported by sizable contributions from data and access solutions, and cash and spot markets.

Net revenues from derivatives markets grew 31%, data and access solutions improved 15%, and cash and spot markets grew 5%.

Operational Details

Total revenues came in at $442 million, also representing a 20% yoy improvement for the top line. The surge was driven by increases in net transaction and clearing fees and access and capacity fees.

Options revenues increased 33% year over year to $255.5 million, boosted by double-digit increases in net transaction and clearing fees, access and capacity fees, and market data.

North American Equities revenues increased 13% year over year to $96.7 million, bumped by higher transaction and clearing fees and access and capacity fees.

Futures revenues of $28.4 million were down 2% year over year, attributable to a decline in net transaction and clearing fees, offset slightly by an increase in access and capacity fees and market data fees.

Europe and Asia Pacific revenues declined 8% year over year to $44.5 million, reflecting softer transaction and non-transaction revenues.

Global FX revenues increased 21% to $17.3 million, driven by higher net transaction and clearing fees.

Total adjusted operating expenses increased 23% year over year to $172.8 million, primarily due to the acquisitions of Cboe Digital (formerly ErisX) and NEO, as well as an increase in salaries, wages, and bonuses resulting in higher compensation and benefits expense.

Adjusted operating income increased 18% year over year to $269.9 million. Adjusted operating margin in the quarter under review contracted 110 basis points (bps) to 60.9%.

2022 Guidance Revised Upward

Cboe Global expects total organic net revenue growth in the range of 14% to 16%, up from 9% to 11% guided earlier. It lowered the adjusted operating expense guidance to $651-659 million from $659-667 million.

CBOE expects organic net revenues from Data and Access Solutions to increase approximately 10% to 13%.

Cboe Global expects capital expenditures in the range of $43-48 million, down from $47-52 million.

Bottom line on CBOE: With volatility expectations and hedging levels poised for sharp spikes during this bear market, CBOE options, volatility products, and market data access will remain in high demand, and sustain top and bottom line growth.


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