Monday, March 1, 1999
HOW DID IT DOUBLE?
Some of the best recent stock performers have been companies that provide discount stock brokerage services. Just as the largest discount brokers with an online presence like Charles Schwab (NYSE: SCH), Ameritrade (Nasdaq: AMTD) and E*Group (Nasdaq: EGRP) raced up the chart last year, eventually the smaller players had to get in on the fun.
JB Oxford rolled out its enhanced online site back in July, but five months later the shares could still be had for less than a buck. Despite a summer shakeup and an autumn share repurchase, it still started out as a cruel winter for the deep discounter.
Then things began to heat up. In a belated piggyback flurry, even before the company surprised the investment community by announcing a return to profitability in the fourth quarter, JB Oxford began to garner recognition as a viable online broker. Click here to confirm your buy order. JB Oxford was in demand.
JB Oxford entered the deep discount brokerage business in 1994. While set up as a Utah corporation, the company's headquarters is situated at the firm's first financial services outlet in Beverly Hills, California. The company also has offices in Miami, New York City, and San Gabriel, California.
In May, Third Capital Partners paid $6 million for a controlling stake in the company. A month later it took the helm of top management, cleaning house on the company's board. While the company is still debating with its auditors and the SEC about the amount of the second quarter 1998 charge it should report, it is a non-cash charge that will not have an impact on book value.
12-month sales: $67.3 million
12-month income: $0.7 million
12-month EPS: $0.03
Profit Margin: 1.0%
Market Cap: $233.5 million
Cash: $9.7 million
Total Assets: $345.3 million
Total Liabilities: $331.2 million
Long-term Debt: $10.6 million
HOW COULD YOU HAVE FOUND THIS DOUBLE?
There was one entity in the know that thought the shares were cheap last year -- JB Oxford itself. Over the last four months of 1998, the company was busy buying back stock options and redeeming convertible debt. In September it hit the open market and bought back 234,000 shares at an average price of just $0.84 a share. By the time the company was done, it had reduced any eventual or actual dilution by 1.2 million shares.
This aggressive across-the-board attempt to snuff out convertible bonds and stock options before the company was in the money, coupled with a physical share repurchase, was a sign of corporate bravado indicating that the company was ready to turn the corner.
There was also the compelling case to be made that JB Oxford actually had an operational online division. Last month found fellow discount brokers M. H. Meyerson & Co. (Nasdaq: MHMY) and Bull & Bear Group (Nasdaq: BNBGA) sharing the coattails of online brokerage stocks, but at least JB Oxford had earned the right to ride. Meyerson had merely announced that it would begin offering online trading by the end of the year at the earliest. The rise of Bull & Bear was an even bigger headscratcher since just two months earlier the company had sold off its online brokerage to concentrate solely on its family of mutual funds.
All the while JB Oxford was there, fueled with the promise of a new cost-cutting management team and an online site since summer, yet lurking in the shadows of investor fancy until just last month.
WHERE TO FROM HERE?
While JB Oxford's new management team is cost conscious, highlighted by recent unit closures that have reduced the workforce by 20%, it understands the need to spend money to establish its brand presence. Last year the company spent $3 million in advertising. This year, despite the closures and absorbing its Stocks 4 Less subsidiary, the company plans to double the amount spent on marketing.
Today, despite the run-up, shares of JB Oxford are trading at just over three times trailing revenues. While not cheap for an upstart, it is a relative bargain compared to the Internet's largest broker, Charles Schwab, which is currently trading at ten times sales. Granted, JB Oxford's operating efficiency has quite a way to go to match Schwab's margins. However, after four consecutive quarterly losses, the company is back on track after reporting earnings of $0.08 a share on solid 21% sales growth. That was a penny shy of what the company earned in all of 1997. There are no analysts giving out earning estimates on the company, but if JB Oxford were to duplicate its fourth quarter showing over the year ahead it would mean a ten-fold improvement in earnings per share in 1999.
As in the rest of the financial services industry, any kind of market downturn will derail that optimistic scenario. As an online broker, the company will feel an exaggerated effect of any negative sentiment towards equities. On the other hand, sector consolidation should continue to keep premiums juiced in a neutral market. Buy? Sell? JB Oxford would love to help you carry out your decision.
--Rick Aristotle Munarriz
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