I admit it, folks. I had high hopes for optionsXpress (NASDAQ:OXPS) when TD AMERITRADE (NASDAQ:AMTD) earlier this month announced its purchase of optionsXpress rival and fellow options trading specialist thinkorswim Group (NASDAQ:SWIM).
As a shareholder and avid follower of the Motley Fool Stock Advisor recommendation, I was pretty sure that what was good for thinkorswim would just have to be good for optionsXpress owners as well. Turns out, that may not be correct.
optionsXpress reported its fiscal 2008 earnings yesterday, and the shares quickly dropped 15% on the news:
- Revenues of $246.6 million grew not a whit from what optionsXpress achieved in 2007.
- This, despite a 21% increase in the number of trading accounts at the company (better than we saw at E*Trade (NASDAQ:ETFC) and seven times as good as what Schwab (NASDAQ:SCHW) reported earlier this month.
- Customer assets dropped 15%.
- And profits slipped 4% to $1.49 per share.
Which, I have to say, is pretty much the opposite of what I expected to see at optionsXpress. As CEO David Fisher pointed out, markets "saw sharp spikes in volatility and dramatic government actions" last year. And seeing as volatility is the trader's friend, I expected options trading in particular to benefit from the helter-skelter markets of yesteryear. But flat revenues and lower profits? Not a chance, thought I.
Actually, a pretty good chance
Turns out, two factors combined to upend my bullish beliefs about optionsXpress. On the one hand, tumbling interest rates put the hurt on interest revenue and fees, which fell 25%, erasing what would otherwise have been a revenue gain from better commissions. Meanwhile, optionsXpress incurred something on the order of 40% higher costs for advertising and "brokerage, clearing and other related expenses." More muted cost growth elsewhere held the total rise in expenses to just 20% -- but against flat revenues, that made a drop in profits inevitable.
Valuation
So business performance wasn't so hot last year. But what about the thinkorswim angle? Could this stock still give investors a profit by way of a sale to a smarter, more cost-efficient operator? I actually think it might.
You see, revenues may be flat at optionsXpress, and profits down -- but down is, as they say, "relative." Viewed absolutely, the firm's 37% profit margin compares favorably to those of big bankers who might profitably roll up optionsXpress into their larger brokerage operations. Thirty-seven percent is about four times the profit Bank of America (NYSE:BAC) makes on a dollar of revenue, and twice what Wells Fargo (NYSE:WFC) earns. With optionsXpress selling for an ultra-cheap, single-digit price-to-earnings ratio, I'm still convinced there's a deal in this firm's future.
What's the "official" Motley Fool Stock Advisor take on optionsXpress' news? Grab yourself a free trial subscription and find out.
