CBOE’s Purchase Of ErisX Was A Dud, But It Can Move Past This Quickly (BATS:CBOE)

Introduction

Cboe Global Markets, Inc. (BATS:CBOE) plays an integral part in the world’s financial marketplace infrastructure. From options to equities to foreign exchange, CBOE is vital across the globe for clearing and transacting these assets. This year, the business posted poor results due to a write-off on a prior digital asset investment, but over the long term, this will be a blip in the radar. Despite the impairment charge, the business is still posting solid growth and is very stable. At around 20x earnings, I am a buyer of CBOE.

Past Financial History

CBOE is a massive enterprise that is a key player in making financial markets. The business has seen revenue go up and down in any given year, but there is a clear upward trend. Over the past five years, CBOE has seen revenue grow at a rate of 9.41%. Each year’s revenue depends on volumes in financial markets for the current economic cycle. Operating and net income have also seen solid growth, with rates of 16.7% and 5.7% each. Looking at each segment will show that the most growth has come from the Options and North America Equities segments. These two lines of business have seen revenue growth rates of 11.23% and 7.92%. Overall, CBOE has had a very steady operation over the past five years but may see bumps and jumps in any given year.

Fiscal 2022 Wrapped Up

In 2022, CBIE posted worse-than-expected results. This is attributable to the impairment charge of $461 million on the ErisX or CBOE Digital segment. CBOE bought ErisX, a digital asset marketplace, in 2022, and at the time booked $461 million in goodwill from the purchase. With some major disruptions in the crypto and digital asset markets, CBOE has decided to write off that goodwill in full. This means the company has very low to no expectations for this business line.

This shows a hefty mistake by the management of the company, but CBOE will power on, as this segment is negotiable to the overall business. Revenue for the year is up by 13.2%. But due to the impairment charge, the company posted operating and net income decreases of 39.2% and 55.6% each. All of the other segments have performed well this year, with Options up 30%, North America Equities up 5%, Europe & Asia Pacific Equities up 7%, Global FX up 18%, and Futures down 1%. If the impairment charge is adjusted out, we are looking at about a 15.2% increase in operating income.

Overall, the purchase and then write-off of ErisX shows a poor decision from management, but this is a blip in the radar of the whole enterprise, and good growth is happening amongst other segments.

Balance Sheet

The CBOE balance sheet is in good shape and allows for even more security in the business. The company has ample liquidity, with a current ratio of 1.05x. CBOE also has a good leverage ratio, with a debt-to-equity of 1.02x. All around, the financial standing of CBOE is stellar and shows no worrisome signs.

Valuation

As of writing, CBOE stock trade at around the price point of $130 per share. At this level, Cboe Global Markets, Inc. sports a P/E of 26.42x using 2021 EPS of $4.92. This year the EPS came in lower at $2.19 due to the impairment adjustments. Without adjusting the EPS, the P/E would be 59.36x, but with the adjusted EPS of $6.93, it would be 18.76x. The company also trades at a P/BV of 4x and has a dividend yield of 1.58%. Taking this information altogether, it seems the business is trading slightly below fair value.

Conclusion

In the end, Cboe Global Markets, Inc. is a massive component in the financial markets of the world, and won’t be disappearing over one bad investment. The ErisX write-off is not great, but the business as a whole is performing well across all segments. At around 20x earnings, this could be a great price point to add more to a Cboe Global Markets, Inc. position or start one.