On Wednesday, Morgan Stanley (NYSE:MS) downgraded CBOE Holdings (NYSE: CBOE) stock, shifting its rating from Equal-weight to Underweight and establishing a new price target of $199.00.
The firm explained that the current share price reflects an overly optimistic expectation for high single-digit to double-digit top-line growth acceleration, which may not materialize due to several risks identified in their analysis.
The downgrade is based on the assessment that CBOE's stock is trading at a premium compared to its historical averages and peers. Currently, CBOE's shares are valued at 22 times Morgan Stanley's estimated earnings per share for 2026, which is slightly above the one-year and five-year historical averages and carries a 7% premium over industry counterparts like NASDAQ (NDAQ) and Intercontinental Exchange (NYSE:ICE), which are seen as offering better growth prospects, stronger competitive positions, and higher margins, such as those seen with CME Group (NASDAQ:CME).
Morgan Stanley's concerns hinge on three main factors that could negatively impact CBOE's earnings and market sentiment. Firstly, the potential for decelerating volume growth could limit the scope for upward earnings revisions. Secondly, the likelihood of operating margin expansion appears slim as management focuses on margin stability amidst business investments.
Lastly, the firm's openness to mergers and acquisitions, as opposed to further divestitures, combined with a limited share repurchase program, could lead to a contraction in the valuation multiple.
The financial institution's stance reflects caution over CBOE's future earnings potential, suggesting that the market's current expectations may not be met, which could result in earnings misses. This outlook, combined with a strategic focus on maintaining rather than expanding margins and a propensity for M&A activity, could contribute to a contraction in the company's valuation multiple.
In other recent news, CBOE Holdings reported robust third-quarter results, with net revenue reaching a record $532 million, marking an 11% increase year-over-year. The company's adjusted earnings per share rose by 8% to $2.22, primarily driven by a 13% organic net revenue growth in the Derivatives market and a 12% rise in Cash and Spot Markets revenues.
In light of these results, CBOE revised its full-year organic net revenue growth guidance to 7%-9% and adjusted its expense guidance to between $798 million and $808 million.
Following this, Deutsche Bank (ETR:DBKGn) adjusted its price target for CBOE, reducing it to $212 from the previous $214, while maintaining a Hold rating on the stock. The firm's analysis followed CBOE's third-quarter results, which presented a mixed financial picture. Despite the earnings beat, Deutsche Bank expressed caution due to trading volumes in the fourth quarter trending below initial expectations in key areas like index options and futures.
Recent developments highlight CBOE's strategic focus on derivatives, data access, and technology, with international expansion and product innovation as key areas. The company has also completed the Canadian migration to the Cboe technology platform, allowing for resource redeployment to growth areas.
These developments reflect the company's commitment to maintaining operating margin stability and balancing investments in growth with scaling existing products and services.
InvestingPro Insights
Recent data from InvestingPro provides additional context to Morgan Stanley's downgrade of CBOE Holdings. The company's P/E ratio stands at 26.29, which aligns with Morgan Stanley's observation of CBOE trading at a premium. This is further supported by an InvestingPro Tip indicating that CBOE is "Trading at a high P/E ratio relative to near-term earnings growth," with a PEG ratio of 2.66.
Despite the downgrade, CBOE has demonstrated strong financial performance, with a revenue growth of 16.16% in the most recent quarter and an EBITDA growth of 9.76% over the last twelve months. The company also boasts a healthy gross profit margin of 51.75% and an operating income margin of 29.36%.
An InvestingPro Tip highlights that CBOE "Has raised its dividend for 10 consecutive years," which may appeal to income-focused investors. The current dividend yield is 1.21%, with a notable dividend growth of 32.2% over the last twelve months.
For investors seeking a more comprehensive analysis, InvestingPro offers 8 additional tips for CBOE, providing a deeper understanding of the company's financial position and market performance.
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