Cboe Global Markets, Inc. (NASDAQ:CBOE) shares are up more than 6.10% this year and recently decreased -0.11% or -$0.14 to settle at $132.19. Nasdaq, Inc. (NASDAQ:NDAQ), on the other hand, is up 4.72% year to date as of 01/11/2018. It currently trades at $80.46 and has returned 2.25% during the past week.
Cboe Global Markets, Inc. (NASDAQ:CBOE) and Nasdaq, Inc. (NASDAQ:NDAQ) are the two most active stocks in the Diversified Investments industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect CBOE to grow earnings at a 21.50% annual rate over the next 5 years. Comparatively, NDAQ is expected to grow at a 9.35% annual rate. All else equal, CBOE’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 16.3% for Nasdaq, Inc. (NDAQ). CBOE’s ROI is 55.80% while NDAQ has a ROI of 2.60%. The interpretation is that CBOE’s business generates a higher return on investment than NDAQ’s.
Cash is king when it comes to investing. CBOE’s free cash flow (“FCF”) per share for the trailing twelve months was -0.26. Comparatively, NDAQ’s free cash flow per share was -0.04. On a percent-of-sales basis, CBOE’s free cash flow was -0% while NDAQ converted -0.18% of its revenues into cash flow. This means that, for a given level of sales, CBOE is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. CBOE has a current ratio of 1.60 compared to 1.20 for NDAQ. This means that CBOE can more easily cover its most immediate liabilities over the next twelve months. CBOE’s debt-to-equity ratio is 0.46 versus a D/E of 0.65 for NDAQ. NDAQ is therefore the more solvent of the two companies, and has lower financial risk.
CBOE trades at a forward P/E of 30.86, a P/B of 5.16, and a P/S of 8.32, compared to a forward P/E of 17.82, a P/B of 2.34, and a P/S of 3.41 for NDAQ. CBOE is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. CBOE is currently priced at a 8.73% to its one-year price target of 121.58. Comparatively, NDAQ is -1.7% relative to its price target of 81.85. This suggests that NDAQ is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.50 for CBOE and 2.60 for NDAQ, which implies that analysts are more bullish on the outlook for NDAQ.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. CBOE has a beta of 0.41 and NDAQ’s beta is 0.71. CBOE’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.CBOE has a short ratio of 4.99 compared to a short interest of 2.96 for NDAQ. This implies that the market is currently less bearish on the outlook for NDAQ.
Cboe Global Markets, Inc. (NASDAQ:CBOE) beats Nasdaq, Inc. (NASDAQ:NDAQ) on a total of 8 of the 14 factors compared between the two stocks. CBOE is growing fastly, is more profitable, generates a higher return on investment, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, GGN has better sentiment signals based on short interest.