Intercontinental Exchange, Inc. (NYSE:ICE) shares are up more than 25.75% this year and recently decreased -0.45% or -$0.32 to settle at $70.63. Cboe Global Markets, Inc. (NASDAQ:CBOE), on the other hand, is up 67.51% year to date as of 12/05/2017. It currently trades at $123.46 and has returned 0.86% during the past week.
Intercontinental Exchange, Inc. (NYSE:ICE) and Cboe Global Markets, Inc. (NASDAQ:CBOE) are the two most active stocks in the Diversified Investments industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect ICE to grow earnings at a 11.15% annual rate over the next 5 years. Comparatively, CBOE is expected to grow at a 20.75% annual rate. All else equal, CBOE’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 26.32% for Cboe Global Markets, Inc. (CBOE). ICE’s ROI is 7.20% while CBOE has a ROI of 55.80%. The interpretation is that CBOE’s business generates a higher return on investment than ICE’s.
If there’s one thing investors care more about than earnings, it’s cash flow. ICE’s free cash flow (“FCF”) per share for the trailing twelve months was +0.23. Comparatively, CBOE’s free cash flow per share was -0.26. On a percent-of-sales basis, ICE’s free cash flow was 2.99% while CBOE converted -0% of its revenues into cash flow. This means that, for a given level of sales, ICE is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. ICE has a current ratio of 1.00 compared to 1.60 for CBOE. This means that CBOE can more easily cover its most immediate liabilities over the next twelve months. ICE’s debt-to-equity ratio is 0.38 versus a D/E of 0.46 for CBOE. CBOE is therefore the more solvent of the two companies, and has lower financial risk.
ICE trades at a forward P/E of 20.98, a P/B of 2.61, and a P/S of 8.77, compared to a forward P/E of 31.04, a P/B of 4.83, and a P/S of 7.79 for CBOE. 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. ICE is currently priced at a -6.78% to its one-year price target of 75.77. Comparatively, CBOE is 9.26% relative to its price target of 113.00. This suggests that ICE 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 2.00 for ICE and 2.50 for CBOE, which implies that analysts are more bullish on the outlook for CBOE.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. ICE has a beta of 0.73 and CBOE’s beta is 0.50. 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.ICE has a short ratio of 1.37 compared to a short interest of 4.45 for CBOE. This implies that the market is currently less bearish on the outlook for ICE.
Intercontinental Exchange, Inc. (NYSE:ICE) beats Cboe Global Markets, Inc. (NASDAQ:CBOE) on a total of 9 of the 14 factors compared between the two stocks. ICE is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, ICE is the cheaper of the two stocks on an earnings and book value, ICE is more undervalued relative to its price target. Finally, ICE has better sentiment signals based on short interest.