Recs

6

optionsXpress' Road to Riches

Oh, come on, people! A measly 2.3% gain? That's the best you can do for optionsXpress (Nasdaq: OXPS  ) , after it blew past its Q3 2007 earnings estimates on Tuesday? So stingy.

[Fool disclosure: The above rant comes straight from the author, an optionsXpress shareholder.]

The news
OptionsXpress trounced analysts' expectations for profits and revenue, earning $0.40 per share on $64.1 million in revenue. It accomplished this by: (1) getting more traders to sign up for its services (account holders rose 26% year over year), and (2) getting those traders to trade more actively (daily average retail trades increased 53%).

The margins
Almost needless to say, in as prototypically scalable a business as brokering equity trades, the greater efficiencies afforded by a growing scale helped optionsXpress achieve a pre-tax profit margin of 64.5%. Management characterized that number as "industry-leading," and indeed, according to Yahoo! Finance, even the best of its rivals -- E*Trade (Nasdaq: ETFC  ) , TradeStation (Nasdaq: TRAD  ) , TD AMERITRADE (Nasdaq: AMTD  ) , Schwab (Nasdaq: SCHW  ) , and Investools (Nasdaq: SWIM  ) -- have to be content with operating margins at least 10% lower.

The reason
But here's what optionsXpress didn't point out; maybe it's the reason for Mr. Market's muted enthusiasm for the company's report: That 64.5% operating margin is below trend. Over the past 12 months, the company had been averaging 66.6%. For all the consolidation we've seen in the brokerage sector over the past few years, pricing pressure still stalks the Street, and optionsXpress' average trade commission declined by 9%.

That fact, plus the worry that the unusual volatility we've seen in the markets the past few months may subside in the future, may be depressing investors' enthusiasm for owning optionsXpress through said future. And I must admit, with the shares now selling for 28 times trailing-free cash flow (at last report), but profits expected to grow only 22% per year over the next five years, I'm beginning to rethink that future myself.


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Rich Smith
TMFDitty

As a defense writer for The Motley Fool, I focus on defense and aerospace stocks. My job? Every day of the week, I'm monitoring the news, figuring out the winners and losers, and tracking down the promising companies for you to invest in. Follow me on Twitter or Facebook for the most important developments in defense & aerospace, and other great stories.

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