Three Cheap 'Transactional' Brokerage Firms

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Includes: IBKR, OXPS, TRAD
by: Paul Price

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 (NYSE: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 (NASDAQ: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. (NASDAQ: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. (NASDAQ: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.