Cboe Global Markets will thrive with a future PE of 28.91x leading to growth

Metrics Used in Calculation

For CBOE Global Markets, I employed two-stage models for both DCF and DDM analysis given the company's established market position with potential for different growth phases:

1. Two-Stage Discounted Cash Flow (DCF) Model

• Phase 1 (Years 1-10): 8% free cash flow growth reflecting CBOE's strong market position and expanding derivatives business
• Phase 2 (Perpetual): 3% growth rate aligned with long-term economic growth expectations
• Projects free cash flows over 10 years plus terminal value using perpetual growth model

2. Two-Stage Dividend Discount Model (DDM)

• Phase 1 (Years 1-10): 8% dividend growth consistent with CBOE's historical 8.8% average dividend growth
• Phase 2 (Perpetual): 3% growth rate for sustainable long-term dividend policy
• DDM is appropriate as CBOE has a consistent 13-year track record of dividend increases with a conservative 32.4% payout ratio

Discount Rate Analysis

WACC Calculation: 5.36%

• Cost of Equity: 6.51% (using CAPM: 4.37% risk-free rate + 0.42 beta × 5.1% market risk premium)
• Cost of Debt: 2.27% after-tax (3.22% pre-tax cost × (1 - 29.4% tax rate))
• Capital Structure: 72.8% equity, 27.2% debt

Why WACC over 12% Discount Rate: I recommend using WACC (5.36%) instead of the 12% discount rate because:

• CBOE exhibits low financial risk with a beta of 0.42, indicating lower volatility than the market
• The company has a stable, predictable business model as a leading derivatives exchange operator
• Strong competitive moats through regulatory barriers and network effects
• Consistent cash flow generation with minimal cyclical exposure
• The 12% rate appears overly conservative given CBOE's risk profile and current market conditions

DCF Model - Two Stage Analysis

Current Financials (2024):

• Free Cash Flow: $1,040M
• Revenue: $4.09B
• Net Income: $765M
• Shares Outstanding: 105.5M

Phase 1 Projections (Years 1-10): Growing FCF from $1,123M in Year 1 to $2,245M in Year 10, with present values totaling $11,947M using WACC.

Terminal Value Calculation:

• Year 11 FCF: $2,313M
• Terminal Value: $58,135M (using 3% perpetual growth)
• Present Value of Terminal: Key driver of total valuation

DCF Results:

• Using 12% Discount Rate: $153.13 per share (-36.5% vs current price)
• Using WACC (5.36%): $657.85 per share (+172.9% vs current price)

DDM Model - Two Stage Analysis

Dividend Analysis:

• Current Annual Dividend (2024): $2.36
• Historical Growth: 8.8% average over recent years
• Payout Ratio: 32.4% - conservative and sustainable

DDM Results:

• Using 12% Discount Rate: $38.20 per share (-84.2% vs current price)
• Using WACC (5.36%): $159.03 per share (-34.0% vs current price)

The DDM values are lower than DCF as they only capture dividend returns, not the full value of retained earnings and business growth.

Summary of Calculations

Valuation Method

12% Discount Rate

WACC (5.36%)

Recommendation

DCF Intrinsic Value

$153.13 (-36.5%)

$657.85 (+172.9%)

Primary Metric

DDM Intrinsic Value

$38.20 (-84.2%)

$159.03 (-34.0%)

Supporting Analysis

Current Stock Price

$241.04

$241.04

Market Price

Key Financial Metrics:

• Market Cap: $25.24B
• Beta: 0.42 (low risk)
• WACC: 5.36%
• ROE: 17.9%
• Debt-to-Equity: 0.37

Based on this comprehensive analysis using appropriate risk-adjusted discount rates, CBOE appears undervalued when using WACC-based DCF methodology. The two-stage DCF model with WACC provides the most accurate intrinsic value estimate of $657.85 per share, suggesting significant upside potential from current trading levels. The DDM serves as a conservative floor, while the DCF captures the full value creation potential of CBOE's market-leading exchange business.

Incorporating CBOE's exceptional Q2 2025 earnings results significantly strengthens the investment thesis and intrinsic value estimates. The updated DCF analysis suggests CBOE is substantially undervalued at current levels, with an intrinsic value of $1,122.96 per share representing potential upside of +365.9%.

Updated Metrics Used in Calculation

Following the strong Q2 2025 results, I revised the valuation models to reflect:

1. Enhanced Two-Stage DCF Model

• Phase 1 Growth (Years 1-10): Increased to 12% FCF growth (from 8%) based on strong operational performance and raised guidance
• Phase 2 Growth (Perpetual): Maintained at 3% conservative long-term growth
• Updated Base FCF: $1,248M estimated for 2025 (20% growth from 2024 levels)

2. Enhanced Two-Stage DDM Model

• Phase 1 Growth (Years 1-10): Increased to 10% dividend growth (from 8%) reflecting strong cash generation
• Phase 2 Growth (Perpetual): Maintained at 3% sustainable dividend policy
• Updated Base Dividend: $2.52 estimated for 2025 based on Q2 quarterly rate of $0.63

Q2 2025 Earnings Impact

Record Financial Performance:

• Net Revenue: $587.3M (+14% YoY) - new quarterly record
• Diluted EPS: $2.23 (+68% YoY), Adjusted EPS: $2.46 (+14% YoY)
• Operating Margin: Improved to 57.7% from 40.9% in prior year
• Six-Month Results: Annualized EPS of $9.20 vs $7.29 in 2024

Raised 2025 Guidance:

• Organic Revenue Growth: Increased to "high single digits" from "mid-to-high single digits"
• Operating Expenses: Lowered to $832-847M from $837-852M
• Demonstrates strong operational leverage and efficiency gains

Business Segment Strength:

• Options: Record $364.8M (+19% YoY) - market leadership maintained
• Europe/APAC: Record $70.4M (+30% YoY) - international expansion success
• Global FX: Record $23.6M (+19% YoY) - diversification benefits
• Data Vantage: Strong $155.1M (+11% YoY) - recurring revenue growth

Discount Rate Analysis - WACC Validation

WACC Calculation Remains Appropriate: 5.36%

• Cost of Equity: 6.51% (CAPM-based with beta 0.42)
• Cost of Debt: 2.27% after-tax
• Capital Structure: 72.8% equity, 27.2% debt (conservative leverage)

Why WACC Over 12% Discount Rate: The Q2 2025 results further validate using WACC rather than the conservative 12% rate:

• Lower Risk Profile: Beta of 0.42 confirmed by stable, predictable business model
• Proven Execution: Management consistently delivering on guidance and strategy
• Market Leadership: Dominant position in derivatives exchanges with regulatory moats
• Strong Balance Sheet: $1.26B cash vs $1.44B debt provides financial flexibility

Updated DCF Model Results

Base Case Assumptions:

• Starting FCF (2025E): $1,248M (20% growth from 2024)
• Growth Phase 1: 12% annual FCF growth for 10 years
• Terminal Growth: 3% perpetual growth rate
• Discount Rate: 5.36% WACC

DCF Valuation Components:

• PV of FCF (Years 1-10): $17,736M
• PV of Terminal Value: $100,360M
• Enterprise Value: $118,097M
• Less Net Debt: $186M
• Equity Value: $117,911M
• Intrinsic Value per Share: $1,122.96

Updated DDM Model Results

Base Case Assumptions:

• Starting Dividend (2025E): $2.52 annual dividend
• Growth Phase 1: 10% annual dividend growth for 10 years
• Terminal Growth: 3% perpetual dividend growth
• Discount Rate: 5.36% WACC

DDM Valuation Components:

• PV of Dividends (Years 1-10): $32.19
• PV of Terminal Dividends: $169.24
• Intrinsic Value per Share: $201.42

Valuation Summary Comparison

Metric

Original Estimate

Updated (Q2 2025)

Change

DCF Intrinsic Value

$657.85

$1,122.96

+$465.11

DDM Intrinsic Value

$159.03

$201.42

+$42.39

Average Value

$408.44

$662.19

+$253.75

Current Stock Price: $241.04

Upside Potential:

• DCF Model: +365.9% upside potential
• DDM Model: -16.4% (dividend-focused, conservative)
• Average: +174.7% upside potential

CBOE intrinsic value comparison showing significant upward revision after Q2 2025 earnings, with DCF model indicating substantial undervaluation relative to current market price

Investment Thesis Strengthened

1. Operational Excellence Demonstrated The Q2 2025 results validate management's ability to execute on strategy while expanding margins and market share across key business segments.

2. Diversified Growth Engine Strong performance across Options, International markets, FX, and Data services reduces dependency on any single revenue stream while capturing secular growth trends.

3. Financial Strength Conservative balance sheet with $1.26B cash provides flexibility for strategic investments, acquisitions, and capital returns while maintaining low financial risk.

4. Market Leadership Position Dominant positions in derivatives exchanges with regulatory barriers to entry and network effects create sustainable competitive advantages.

Final Recommendation

CBOE appears significantly undervalued based on updated intrinsic value analysis incorporating Q2 2025 results. The DCF intrinsic value of $1,122.96 represents compelling upside potential of +365.9% from current levels.

Key supporting factors:

• Record financial performance with raised guidance
• Proven operational leverage driving margin expansion
• Strong competitive moats in derivatives exchange business
• Conservative balance sheet supporting growth investments
• Management track record of consistent execution

The Q2 2025 earnings validate the use of WACC-based valuation methodology and support higher growth assumptions given demonstrated execution capabilities and market positioning.