A.G. Edwards Misses the Mark

When most investors think of full-service brokers, names such as Merrill Lynch (NYSE: MER), Goldman Sachs (NYSE: GS), and Morgan Stanley (NYSE: MWD) usually come to mind. While venerable firms such as these have helped form the bedrock of Wall Street for generations, not all great money managers call New York home. A.G. Edwards (NYSE: AGE), for example, has been assisting clients with their investments since 1887, from halfway across the country in St. Louis.

Today, the company provides a broad range of financial services, including retail brokerage, trusts, asset management, and investment banking. Traditional securities commissions, though, still represent the main source (40% last year) of A.G. Edwards' revenues, and the firm's 6,800 financial consultants manage nearly $300 billion in client assets.

Yesterday, the company reported second-quarter earnings of $0.52, or $41 million, a 13% improvement over last year but $0.03 shy of estimates. The miss, though, was far narrower than the $0.17 shortfall that rival Morgan Stanley posted earlier this week. A.G. Edwards' revenues fell 4% to $614 million, as a slowdown in the equity markets took a toll on trading volume.

Revenues from commissions fell 12% to $237.1 million, but A.G. Edwards was not alone in announcing that trading had cooled over the summer. Morgan Stanley also reported a 12% decline, and Goldman Sachs' equities-trading revenues dropped by 17%. The trend has been similar for discounters, as August daily average revenue trades (DARTs) at Motley Fool Stock Advisor recommendation Charles Schwab (NYSE: SCH) and E*Trade (NYSE: ET) fell 11% and 17% from the month before, and analysts anticipate volumes for the full quarter will drop 10% and 20%, respectively, over the same period last year.

Investment banking revenues were also weaker, falling 39% to $58 million, but asset management and service fees climbed 27%, reflecting client demand for fee-based investment platforms. Over the past four quarters, assets in fee-based accounts have swelled 17% to $27.4 billion, and through the first half of the fiscal year, revenues have jumped 33% to $428 million.

As with many brokers, A.G. Edwards is still struggling to catch up with the levels seen back in 2000, but the stock trades at less than 15 times current-year earnings, which are expected to rise 22% to $2.40. Furthermore, the company sports a pristine balance sheet, with virtually no long-term debt, and over $250 million ($3.17 per share) in cash. Whenever the market decides to resume its upward climb, A.G. Edwards will be poised to follow.

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Fool contributor Nathan Slaughter owns none of the companies mentioned.