FOOL PLATE SPECIAL
TD Waterhouse announced Q1 EPS ahead of Street lowered estimates and warned that it wouldn't meet its lofty goal of 1.2 million new customers and $40 billion in new assets for the year. The company is tightening its belt and diversifying, but its customer assets are declining. Neither the company nor its industry have a clear future. Investors should beware.
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Number 2 discount broker TD Waterhouse Group (NYSE: TWE) reported a 35% drop in Q1 profit yesterday. The company reported EPS of $0.13, excluding goodwill and amortization costs, against Street expectations of $0.11 a share. TD Waterhouse further warned that it may not meet its goal of adding 1.2 million new customers and $40 billion in new assets this year, backtracking from its November 2000 boast. Both new account growth and customer assets declined. The company added 160,000 new accounts for the quarter, against 260,000 for the same period last year. The company's daily trade count dropped from 151,900 in Q4 2000 to 149,100 in Q1 2001, off 21% from Q1 2000, and total customer assets declined 14%. Ouch. On the plus side, TD Waterhouse did tighten its belt, cutting advertising and marketing spending 23% to $28 million, reducing its cost per new account to $175. Industry shakeout Keys to survival Did Ameritrade default? The coming consolidation For now, TD Waterhouse's growth has stopped and its profits have pulled back dramatically. Its stock was off as much as 9% in trading this morning. Until profitability and consolidation are clearer, this sector should sport a sign with large letters: "Will burn if touched." Tom Jacobs doesn't own shares in any of the companies mentioned above. To see what he does own, visit his profile. The Motley Fool is investors writing for investors.
At least the company is still profitable. It dominates the cutthroat online broker space with No. 1 Charles Schwab (NYSE: SCH). E*Trade (Nasdaq: EGRP) -- Motley Fool Research Analyst Todd Lebor's Valentine's Day love stock -- is a ways back in third, and unprofitable Ameritrade (Nasdaq: AMTD) and CSFBdirect (NYSE: DIR) (formerly DLJ Direct), as well as others, lag farther behind. (You can find and compare brokers at the Fool's discount broker center.) As competition has increased, all the stocks have suffered: 2/13/01 52-week % below
close high high
Charles Schwab $25.40 44.75 -43%
TD Waterhouse 14.81 27.00 -45%
E*Trade 12.50 34.25 -36%
Ameritrade 8.97 25.13 -68%
CSFBdirect 3.98 16.00 -75%
Paul Commins did a detailed analysis of the industry last month in a story on Ameritrade. According to Paul, diversified revenues streams are crucial for survival: Trade commissions, margin interest, bank/credit card interest spread, market making (bid/ask spread and trading profits), proprietary mutual fund fees, and investment banking. Among these five companies, Schwab, TD Waterhouse, and E*Trade have the lead in diversifying their revenue streams, but Ameritrade has made efforts, most recently with its announcement today to buy software maker TradeCast, to enter the professional trading market.
But, Ameritrade jolted investors and creditors last Friday with its plan to repurchase $200 million in debt at a 40% discount to face value, leading credit-rating agency Standard & Poor's to reduce the company's credit rating to "C," one level above default, after threatening to declare a default. Credit ratings influence the interest rate lenders are willing to charge a company. Ameritrade should probably cut its $200 million a year marketing expenditures before taking on more debt.
Big picture, Morgan Stanley Dean Witter's (NYSE: MWD) Henry McVey predicts that the 140 U.S. online brokers will be about 6 when the dust finally settles. For the survivors, single-digit commissions are going the way of the Dodo. For just one example, Ameritrade's competitor, Suretrade.com, has been re-absorbed into Quick & Reilly, and its $7.95 trades are now a minimum of $14.95.
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