On Dec 7, Zacks Investment Research downgraded CBOE Holdings Inc. (CBOE - Analyst Report) to a Zacks Rank #3 (Hold) from a Zacks Rank #2 (Buy).
Why the Downgrade?
Earnings estimates for CBOE have not witnessed any momentum owing to mixed third-quarter 2013 results and slightly weak volumes in Nov 2013. However, this derivative exchange operator outperformed the 3-month Nasdaq index, which posted growth of 8.4% against 1.4% clocked by CBOE.
On Nov 1, CBOE reported third-quarter operating earnings per share of 47 cents. Results modestly surpassed the year-ago quarter earnings of 43 cents and the Zacks Consensus Estimate of 45 cents. However, total operating revenues missed the Zacks Consensus Estimate by 1%.
CBOE’s top line continues to be adversely affected by moderation in transaction fee revenue, lower average revenue per contract and a high tax rate. Nonetheless, reduced expenses and improved regulatory and service fees boosted margins during the quarter.
Additionally, average daily volumes stood slightly lower in the first nine months of 2013. While improvement was witnessed in Oct 2013, volumes again underperformed in Nov 2013, reflecting significant volatility.
Following the earnings release, the Zacks Consensus Estimate for 2013 edged up by a penny to $1.98 per share in the last 60 days. Meanwhile, the Most Accurate estimate for CBOE’s 2014 earnings stands at $1.97 a share, resulting in an Earnings ESP of -0.5%. Simultaneously, the estimate for 2014 inched up 2 cents to $2.30 a share in the last 60 days.
CBOE’s growth appears to be stagnating due to the absence of any fundamental growth catalyst amid the intensely competitive environment. The acquisition of NYSE Euronext Inc. by IntercontinentalExchange Group Inc. (ICE - Analyst Report) last month also puts additional pressure on CBOE’s market retention and operating leverage.
Other Insurers Worth a Look
We prefer to remain on the sidelines regarding CBOE for the time being. However, investors interested in the financial sector may consider stocks like IntercontinentalExchange, Nasdaq OMX Group Inc. (NDAQ - Analyst Report) and Cigna Corp. (CI - Analyst Report) ). All these stocks carry a Zacks Rank #2.