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Online Brokers' Tough Quarter Could Get Tougher
Though most companies are topping earnings estimates as well as last year's income totals on stronger revenues, there's an alarming lack of Q1 success from the online brokerage firms. Worse, the reason behind the first-quarter woes may be poised to plague the group through the rest of 2010.
IN PICTURES: 10 Tips For Choosing An Online Broker
Number Don't Lie
If it were just one shortfall from an online trader last quarter, it might be dismissible. When the results are off across the board though, something's wrong. Take a look at this year's actual earnings per share compared to last year's and this year's estimates.
Of the five companies below, three fell short of estimates, while three fell short of last year's numbers.
One could argue that Ameritrade actually beat estimates last year with its earnings of $0.27 per share, but read the fine print; the number is only $0.24 when excluding a one-time tax benefit. And, one of the two "beats" was a tarnished one - E*Trade still lost money, and isn't expected to make any in 2010.
Less With More
As if the weak first quarter wasn't frustrating enough for investors who had to watch other stocks chime in with big income increases, most of the online brokers added salt to the wound by posting lower incomes despite greater assets (more investor money being held at the firm) and/or despite higher revenues.
Schwab, as an example, reported that revenue was down 12% last quarter compared to Q1 of 2009, yet total client assets were 36% greater at the end of March than they were at the end of March of 2009. Yes, the company's doing less with more; it's frightening to think what the quarter would have looked like had net assets actually fallen.
Ameritrade's asset growth jumped 59% on a year-over-year basis, but didn't help the bottom line a bit.
Similar points could be made of the other brokers as well. Moral of the story? More assets clearly don't mean more income.
But Why?
There are really three things going on here, two of which should continue indefinitely, dragging income lower as long as they do.
The first - and no longer a factor - explanation of the disappointing quarter is the comparison to the first quarter of 2009. Yes, it was economic Armageddon at the time, but selling stocks just to get rid of them still generates a revenue-bearing trade - and there was plenty of selling in Q1 of 2009. It's an unfair comparable. That anomaly won't affect future year-over-year comparisons though.
The second sore spot for brokers is low interest rates. Aside from crimping the interest these companies can earn by making margin loans, low interest rates have forced many of these brokers to waive money market fees - as a courtesy - to prevent customer cash balances from sinking. With interest rates likely to remain low for quite some time though, this lost fee revenue isn't apt to be a one-time event.
The third issue at hand has more to do with forecasts for the second quarter of 2010 and beyond - they were largely based the second, third, and fourth quarters of 2009. The only problem is, 2009 started out as a bearish firestorm, and then turned into a bullish firestorm. Now that the dust is settling though, traders don't want or need to be as active. Therefore, trading revenues aren't apt to be as strong as originally planned.
The Bottom Line
The fact that Ameritrade just slashed its 2010 EPS forecast by about 20%, while TradeStation now sees its second-quarter income possibly as low as half the original estimate of $0.08 suggests that the realities are starting to set in for these brokerages. (For more, see 10 Tips For Choosing An Online Broker.)
IN PICTURES: 10 Tips For Choosing An Online Broker
Number Don't Lie
If it were just one shortfall from an online trader last quarter, it might be dismissible. When the results are off across the board though, something's wrong. Take a look at this year's actual earnings per share compared to last year's and this year's estimates.
Of the five companies below, three fell short of estimates, while three fell short of last year's numbers.
One could argue that Ameritrade actually beat estimates last year with its earnings of $0.27 per share, but read the fine print; the number is only $0.24 when excluding a one-time tax benefit. And, one of the two "beats" was a tarnished one - E*Trade still lost money, and isn't expected to make any in 2010.
|
Brokerage Firm |
Q1-2009 |
Est. Q1-2010 |
Actual Q1-2010 |
|
E*Trade (Nasdaq:ETFC) |
($0.04) |
($0.03) |
($0.02) |
|
TradeStation (Nasdaq:TRAD) |
$0.11 |
$0.06 |
$0.07 |
|
Charles Schwab (Nasdaq:SCHW) |
$0.19 |
$0.11 |
$0.10 |
|
TD Ameritrade (Nasdaq:AMTD) |
$0.23 |
$0.24 |
$0.23 |
|
Interactive Brokers (Nasdaq:IBKR) |
$0.30 |
$0.19 |
$0.09 |
|
Figure 1 - Online Brokers - Operating EPS Versus Estimates for Q1, 2010 |
|||
Less With More
As if the weak first quarter wasn't frustrating enough for investors who had to watch other stocks chime in with big income increases, most of the online brokers added salt to the wound by posting lower incomes despite greater assets (more investor money being held at the firm) and/or despite higher revenues.
Ameritrade's asset growth jumped 59% on a year-over-year basis, but didn't help the bottom line a bit.
Similar points could be made of the other brokers as well. Moral of the story? More assets clearly don't mean more income.
But Why?
There are really three things going on here, two of which should continue indefinitely, dragging income lower as long as they do.
The first - and no longer a factor - explanation of the disappointing quarter is the comparison to the first quarter of 2009. Yes, it was economic Armageddon at the time, but selling stocks just to get rid of them still generates a revenue-bearing trade - and there was plenty of selling in Q1 of 2009. It's an unfair comparable. That anomaly won't affect future year-over-year comparisons though.
The second sore spot for brokers is low interest rates. Aside from crimping the interest these companies can earn by making margin loans, low interest rates have forced many of these brokers to waive money market fees - as a courtesy - to prevent customer cash balances from sinking. With interest rates likely to remain low for quite some time though, this lost fee revenue isn't apt to be a one-time event.
The third issue at hand has more to do with forecasts for the second quarter of 2010 and beyond - they were largely based the second, third, and fourth quarters of 2009. The only problem is, 2009 started out as a bearish firestorm, and then turned into a bullish firestorm. Now that the dust is settling though, traders don't want or need to be as active. Therefore, trading revenues aren't apt to be as strong as originally planned.
The Bottom Line
The fact that Ameritrade just slashed its 2010 EPS forecast by about 20%, while TradeStation now sees its second-quarter income possibly as low as half the original estimate of $0.08 suggests that the realities are starting to set in for these brokerages. (For more, see 10 Tips For Choosing An Online Broker.)
by
James Brumley
James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.
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