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Daily Trouble
By
How Did it Find Trouble? Sometimes, timing is everything. Consider discount stockbroker Waterhouse Securities, which sold itself to Toronto Dominion in 1996 -- too early to cash in on the online brokerage stock boom. Consider that same company, a few acquisitions later, spun off this summer -- too late to cash out. Then again, priced at $24 a share, the born-again broker was valued at a cool $9 billion when it rolled out as a public offering in June. Somebody ended up happy. Unfortunately, it wasn't those buying in. The online brokerage industry went on to get hit by a double whammy. Beyond the general apathy towards cyberspace stocks over the past few months, the volume of trades placed with online brokers has fallen in both July and August. Barring a dramatic September surge, this will mark the first quarter where online brokerage houses post a sequential shortfall. The joy of crashing any party is short-lived if the last of the food trays just got cleared out. For Waterhouse, being fashionably late bears a price. The party was over -- for now. Business Description Waterhouse is the second-largest discount broker, servicing more than two million active accounts through 200 worldwide branches. The company has $113 billion in assets under administration and is also the second-largest online broker in terms of trade volume. The company sold an 11.5% stake, or 43.4 million shares, in a June public offering. Financial Facts
Income Statement How Could You Have Seen it Coming? That's right, 43.4 million shares makes for a whopper of an IPO. It's safe to say that anyone who wanted a piece got a piece. That is probably why the shares had to do without the opening day pop that most have grown used to seeing when a prolific wired company goes public. Yet, beyond the size of the deal and the industry malaise, some trends were apparent before the first shares began to trade hands. Thumbing through the offering prospectus, a few items probably stand out. As Waterhouse shifted from offline to online (with 64% of its daily trades placed through the company's website or through direct dial-up service), the business model was changing, too. In just two years, the average trade commission had been halved -- from $47 to $24 a transaction. However, through organic growth and the acquisition of smaller discount brokers like Jack White, the number of accounts quadrupled. But the company wasn't necessarily reaping the economies of scale that this market penetration would imply. In 1997 the company's marketing department was spending $57 for each new account. Earlier this year, that figure was up to $63 a head. Assuming that Waterhouse was worth $9 billion back in June implied a great deal of faith that Wall Street trading volume would be locked on crescendo. A cruel summer fade-out burst that bubble -- and Waterhouse's.
Where to From Here? Is Waterhouse undervalued? Perhaps. Considering that E*Trade Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %> is neck-and-neck with Waterhouse in terms of size, yet valued more than a billion dollars higher, it might seem as if Waterhouse is suffering from an identity crisis. No, Waterhouse recognizes itself. It has done a solid job playing the game of sector consolidation -- and the company has been a visionary too. Long before E*Trade was serenading Telebank, Waterhouse had its own bank set up and was offering CDs, credit lines, and credit cards to its growing base of accountholders. The identity crisis does not come from within. It just seems as if the investment community is not familiar with the equity -- despite its billion-dollar IPO. Trading volume for the stock is consistently lower than that for E*Group and online giant Charles Schwab <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SCH)") else Response.Write("(NYSE: SCH)") end if %>. But that might be a superficial knock. The more critical fundamental tear lies in whether the industry slowdown continues. Not even Schwab has been spared and, until the trend reverses back into positive territory, it will be hard for investors to justify aiding the cause for anything other than short orders.
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