A short time ago we added the shares of Cboe Global Markets (CBOE) to the Bullpen, and now we're going to take a closer look at the company and its business, which centers on market infrastructure, data solutions, and tradable products for equities, derivatives, and foreign exchange across North America, Asia Pacific, and Europe. Those operations include the largest options exchange and the third largest stock exchange operator in the U.S., one of the largest stock exchanges by value traded in Europe, and EuroCCP, a leading pan-European equities and derivatives clearinghouse among others.
Based on its businesses, the company reports in five business segments:
- Options (51% of 2021 revenue; 65.7% of 2021 operating income): The segment includes options on market indexes, better known as index options; on the stocks of individual corporations (equity options); and options on exchange-traded products such as exchange-traded funds.
- North American Equities (24.6%; 19.1%): Listed U.S. equities and ETP transaction services that occur on fully electronic exchanges owned and operated by the company.
- Europe & Asia Pacific (12.5%; 6.8%): Pan-European listed equities and derivatives transaction services.
- Futures (7.9%; 8.1%): Transaction services provided by the company's fully electronic futures exchange and the licensing of proprietary market data, as well as access services.
- Global F/X (3.9%; 0.3%): Institutional FX trading services that occur on the Cboe FX fully electronic trading platform as well as revenue generated from the licensing of proprietary market data and from access and capacity services.
As we can see above, the two primary drivers of the company's earnings are its options and North American equities business, which combined drive around 75% of its revenue but more importantly roughly 85% of its operating income. What those reporting lines skip over, however, is that 28%-30% of Cboe's revenue stream is from recurring non-transaction revenue that includes proprietary market data as well as access and capacity fees.
Over the last few years, Cobe has steadily grown its revenue from 996 million in 2017 to $1.5 billion in 2021, with its EPS increasing 77% over that span of year to $6.05. While trading volumes for equities have increased, the two main drivers of that revenue increase have been the outsized gains in options trading as well as continued growth in the company's recurring non-transaction revenue business.
Almost 39 million option contracts changed hands on an average day last year, up 31% from 2020 and the highest level since the market's inception in 1973, according to figures from the Options Clearing Corp. Though much of this trading is being done by Wall Street firms that work behind the scenes, individuals' increasing embrace of options trading is unmistakable. By one measure, options trading by individual investors has risen roughly fourfold over the past five years, according to Cboe data. And according to data published by Alphacution Research, retail traders now account for more than 25% of total options trading.
For this past January, Cboe reported options volume on its four options exchanges combined was 282.5 million contracts in January, the second-highest monthly volume on record. With equity volatility elevated since the onset of 2022, total volume in S&P 500 Index options was 36.5 million contracts in January, the highest monthly volume since March 2020. Speaking of volatility, Cboe Volatility Index (VIX) futures total volume of 5.7 million contracts in January, with an average daily volume (ADV) of 285,000 contracts. The strength in options trading continued in February as investors became increasingly wary of inflation and the Fed. That combination helped drive total volume across Cboe's option exchanges to 250.9 million contracts, the highest February volume in the company's history. With the start of the Russia-Ukraine war and the spike in volatility odds are options volume continued to be robust in March.
That level of options trading volume and the continued growth in the company's recurring non-transaction revenue is expected to drive revenue in the first half of the year up just over 11% vs. that in 2021 while the consensus EPS forecast calls for far more meaningful EPS growth near 25%. Compared to a month ago, those EPS expectations haven't changed demonstratively, which means they haven't been meaningfully adjusted since the start of the Russia-Ukraine war. Odds are those expectations will need to be revised higher.
Where things get a little more challenging is in the second half of the year, where the year-over-year EPS growth falls to something close to 2%. While some may think that reflects seasonality in options trading, assessing the historical revenue segment data we've yet to see that like we do in equity trading that tends to slow in the September quarter. Rather, that lack of seasonality in options trading likely reflects the continued adoption by investors both institutional and individual. Looking into 2023, that adoption should continue as should the growth in Cboe's recurring non-transaction business, which leads the consensus forecast to $1.7 billion up from $1.6 billion this year with earnings per share of $6.45 vs. $6.10 this year and $6.05 in 2021.
In terms of upside in the share price, the consensus price target is $137, which offers about 20% upside. While recent peak price-to-earnings and dividend yield multiples support that, that analysis also points out potential downside in the shares to $95-$99, roughly 13%-17%. In our view the neutral risk-reward is going to keep us on the sidelines with CBOE shares until either it skews more to the potential upside to be had or we see signs the company's 2022 EPS is looking to be meaningfully higher in the second half of 2022 than it currently does. In terms of the former, it would mean a share price below $105, which would equate to a dividend yield of around 1.8%. Sticking with that valuation metric, CBOE shares bottomed out in 2020-2021 at a dividend yield of 1.93%.
On a comparative basis, we'd note the shares of Nasdaq (NDAQ) and the Intercontinental Exchange (ICE) , which houses the New York Stock Exchange and a variety of data services, are trading at 22-times and 23.5-times earnings. On a dividend yield basis, those shares are trading at 1.3% and 1.2%, respectively, roughly in line with levels where CBOE shares have peaked on that basis.
While the addition of CBOE shares to the portfolio would bring several positives, including further diversifying the portfolio and adding to the number of positions that pay dividends, we're more inclined to revisit the shares at lower levels, again, when that risk to reward tradeoff skews considerably in our favor.