Three Cheap 'Transactional' Brokerage Firms

At times when market panic is in the air most stocks get hit hard. This has been especially true of most brokerage company shares in the wake of the 'Bear Stearns Meltdown.' All three of the stocks I'm about to mention hit new 52-week lows one week ago on March 17, the day the Bear Stearns (BSC) news was first being reflected on Wall Street.

What is notably different about each of these companies versus Bear Stearns is that these are intermediaries for trading rather than full service houses. They earn most of their profits through trading commissions and through the interest rate spreads between what they earn on customer cash balances, and the credit interest they pay to those customers.

With the incredible volatility we've seen lately, many on-line traders are more active than ever. This is a good thing for the companies I'll be speaking about in this article.

OptionsXpress (OXPS)

March 23, 2008 price: $20.75

52-week range: $18.55 [Mar. 17, 2008] - $34.95 [Dec. 27, 2007]

It is important to note that the high and low were set less than three months apart. This is a volatile stock [official Beta = 1.3] that is very tradable.

The fundamental picture looks excellent. 2007 saw record revenues of $247 million vs. $187.9 million in 2006, and its EPS grew 34.8% going from $1.15 to $1.55. As of its last filing, the company was debt-free, with $669.55 million in cash.

Consensus estimates for 2008 & 2009 now run $1.68 and $1.93 respectively. That makes OXPS shares only 13.4 X's trailing and 12.4 X's forward projections. This is the lowest P/E for these shares since coming public in 2005. In both 2005 and 2006 OXPS shares averaged over 22x final EPS.

In 2007 its ROE was a healthy 42.62%, operating margins were 64.59%, and net profit margins were 39.56%.

Thomas Stern, a company officer, recently made open market purchases of 3,000 total shares. He purchased 1000 shares on Feb. 22 at $23.85, and 2000 shares on Mar. 13 at $20.42/share.

Unlike many of its peers, OptionXpress pays a dividend. From $0.12/share in 2005 it reached $0.20 in 2006, and this was boosted to a $0.25 yearly rate in 2007. As a result, OXPS now yields 1.21%.

Even an 18 multiple on this year's projection of $1.68/share brings me to a 12-month target price of $30.24 or up 45.7% from Sunday's quote. The absolute lowest prices on OXPS shares in 2006 and 2007 were $20.75 and $20.78 respectively, even during periods of extreme market turmoil.

TradeStation Group, Inc. (TRAD)

March 23, 2008 price: $9.01

52-week range: $8.43 [Mar. 18, 2008] - $14.87 [Dec. 26, 2007]

Like OptionsXpress, TRAD shares hit its yearly high less than three months ago before getting crushed in the wake of BSC's fall. Its Beta is 1.6, so expect volatility here.

Its fundamentals look great, and 2007 saw new records in sales, cash flow, earnings, and book value. Its EPS have grown steadily since 2002:

2002: $0.02

2003: $0.27

2004: $0.33

2005: $0.48

2006: $0.67

2007: $0.78

TradeStation is debt-free with over $600 million in cash, and only 43.88 million shares outstanding. The company was just rated #1 by Barrons in its recent rankings of on-line brokers.

Prior to this year, its average annual P/E has never been less than 18.1 X's, and has typically run more than 20 times. This year, its earnings are likely to be in the range of flat to slightly down, as the interest rates it is earning on cash balances have come down with the Fed's rate cuts. Its trading volume has been up, though, and approximately offsetting that negative.

Operating and net profit margins last year were 40.42% and 23.34%, and its ROE was a very good 26.98%. Consensus views for 2008 & 2009 are now at $0.76 and $0.85 respectively.

A return to even 18 X's that $0.76 current year estimate would bring TRAD shares back to $13.68, or up almost 52% from last week's price.

What's the risk? The absolute low shares prices hit in 2006 & 2007 were $11.11, and $9.41 even when the markets were very bad. Is my $13.68 goal price achievable? These shares actually traded at highs of $14.18+ at some point in each calendar year since 2005.

InterActiveBrokers Group, Inc. (IBKR)

Mar. 23, 2008 price: $26.90

52-week range: $20.25 [Mar. 17, 2008] - $35.93 Feb. 1, 2008

These shares actually hit their all-time high approximately six weeks before bottoming after the BSC news. IBKR came public last year at just over $30 when the market was still hot.

Its 2007 revenues were $1.36 billion, and EPS were a record $1.59. Its debt/equity was over 4.1x.

InteractiveBrokers is expected to earn $1.86 in 2008 and $2.14 in 2009. Thus IBKR shares now trade at 16.9 X's trailing, and 14.5 X's nicely growing earnings. As with the other companies, its ROE is outstanding at 29.09%, operating and net profit margins were 60.45% and 32.07%, respectively.

InteractiveBrokers was Barron's #1 ranked on-line brokerage for low investor costs, and tied for #3 in their overall best broker rankings.

Even a 19 multiple on these volatile shares brings me to a 12-month target price of $35.34 or up more than 31% from last week's level.

Disclosure: The author is long shares, and short puts on all three of the stocks mentioned.

Comments

[Grasshopper]

TRAD does not have $600MM in cash on hand. They're total mkt cap is under $400MM. Someone didn't check their stats. That cash may represent some reserves on hand RE: the brokerage business. ALSO, the CFO says their income declines 12 cents for every full rate point cut by the fed. After the recent cuts, analysts are forecasting flat earnings relative to 2007.

[User 167856]

Does your analysis of IBKR take into account the fact that the shareholders only own 10% of the brokerage company? Shouldn't your price target actually be $3.53, not $35.34 - assuming your analysis is valid at all?

[Paul Price]

The cash figure is right off their latest Value Line report. It is correct.

The target is based on per share earnings. All shareholders have the same claim on profits regardless of how much stock is in public hands.

[Paul Price]

Sorry, the correct cash for TradeStation is $92 MM. My bad.

[User 314159]

Paul - Do you think there is any chance at all of IBKR getting caught on the wrong side of some market making? For example, if they were making a market in BSC 30 puts when the stock was at 60, and two days later it was at 2, and IBKR ended up being short those puts? That could have cost them millions if something like that were to happen. I think the stock is down from 33 because there are fears they could go bankrupt due to some bad market making and getting caught on the wrong side of a market during volatile times. The commission side of their option business is just fine, it's the market making I'm worried about.

[Paul Price]

All market makers take some risk of holding positions that can go against them. In the same way, though, they will sometimes make money by being forced to hold positions that work out well.

Over time, the specialist tends to do well as they are forced to buy when others panic sell and forced to short into rabid enthusiasm. Both those actions usually end up being the right side of the trade.

[Paul Price]

optionsXpress Announces First Quarter 2008 Results
Tuesday April 22, 8:00 am ET


CHICAGO--(BUSINESS WIRE)--optionsXpress Holdings, Inc. (NasdaqGS: OXPS - News) today reported results for the three months ended March 31, 2008. Highlights from the first quarter of 2008 included:

Revenues of $60.8 million, an 11% increase year-over-year

Net income of $23.8 million, or $0.38 per diluted share

Daily average revenue trades (DARTs) of 38,000, a 24% increase year-over-year

Net new account growth of 14,700 during the quarter, resulting in 277,100 customer accounts, a 24% increase year-over-year

Industry-leading 62% pre-tax margins
$5.4 billion in customer assets on March 31, 2008, a 9% increase year-over-year




Interactive Brokers (IBKR):
4:00pm 04/24/2008


IBKR ($27.87, +0.39, +1.4%) said first-quarter net income came in at $27.2 million, or 66 cents a share, more than double the same period a year ago.

Net revenues were $528.4 million, up from $330.8 million in the same period.

Interactive Brokers was expected to make 50 cents a share, according to three analysts in a Thomson Financial survey.

Shares gained 6.75% after hours.

[Paul Price]

TradeStation earnings up on busier tradingSouth Florida Business Journal
Print Article Email Article Reprints RSS Feeds ShareThis
Related News
TradeStation earnings up on trades [South Florida]
Early earnings results still positive, despite housing downturn [South Florida]
TradeStation Q3 earnings up 24% [South Florida]
TradeStation Group said its earnings rose 1 percent in the first quarter, as market volatility pushed customers to trade.

The Plantation-based electronic trading platform said it earned $8.3 million, or 19 cents a share, on revenue of $40.7 million. In the prior-year quarter, the company said it earned $8.2 million, or 18 cents a share, on revenue of $35.3 million.

TradeStation (NASDAQ: TRAD) said its brokerage fees and trading commissions jumped 37 percent, driven by heavier trading volume.

The company said its clients made an average of 109,219 trades a day in the first quarter, up 56 percent. Client accounts grew 17 percent, to 38,657.

Shares closed up 7 cents to $9.27. The 52-week high was $14.87 on Dec. 24. The 52-week low was $8.11 on March 31.

[Paul Price]

Interactive Brokers [IBKR] blew right through all estimates in its March quarter with EPS of $0.66 v. $0.31 in 2007.

The shares are now north of $30.