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CBOE Holdings: A Unique Franchise
08/20/2013 7:00 am EST
We reiterate our Strong Buy recommendation on this company that has a unique franchise and is poised for growth, suggests S&P Capital IQ equity analyst Kenneth Leon in Marketscope.
We support a premium valuation for CBOE Holdings (CBOE), mostly for the company's proprietary position within the S&P 500 Index complex and the CBOE Volatility Index (VIX) trading products complex, which is rapidly gaining in popularity with a broader set of new customers.
The index options from S&P Dow Jones Indices are through exclusive multi-year licensing agreements to list options based on the S&P 500, S&P 100 and DJIA.
On March 8, CBOE and S&P Dow Jones Indices reached an agreement whereby CBOE has exclusive trading rights to trade and to create new options on the S&P 500, and the S&P 100, and other derivative indexes through 2032.
CBOE has a working relationship with S&P Dow Jones Indices on ways to develop new indices for the SPX and VIX product family. (S&P Dow Jones Indices operates independently of S&P Capital IQ Equity Research.)
Management is exploring the development of US Treasury trading products tied to VIX. We believe CBOE's goal to enhance shareholder value through product innovation and globalization will spur attractive organic growth, which continues to outstrip that of the peer group, which consists of larger companies.
Right now, 15% to 20% of average daily volumes in index options and futures come from non-US trading sources. The introduction of 24-hour trading, 5-days a week will enable non-US institutions to participate in CBOE's key trading products.
With the opening of the London trading hub earlier this year, we believe this is a game changer that will spur future growth, as it enables buy-side institutions and other trading firms to take advantage of VIX futures trading.
Our investment thesis for CBOE is as a growth story, with an attractive franchise, that is poised for faster secular growth from proprietary index options and futures products. Investment risks are tied to execution with new technology platforms, market conditions, and trading volume activity.
We think CBOE's exclusivity with major market index options and futures contracts supports a premium valuation for the shares, along with its potential appeal as an attractive asset to larger market exchange operators.
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