NEW YORK -- Online brokers are breathing a bit easier these days after facing the possibility of their first bear market in early October.
That is partly because the stock market has made a remarkable comeback. But more importantly, online trading activity didn't decline during the mid-July to early-October market rout.Analysts have stopped questioning if Charles Schwab Corp., ETrade Group Inc. and Ameritrade Holding Corp., among others, will be able to duplicate in this quarter the strong trading revenue seen during the bull market of recent earnings periods.
Instead, they have recently looked closely at their estimates to see if the stock market rebound may translate into above-forecast earnings or stronger revenue for the online brokers.
On Monday, online traders DLJDirect, a unit of Donaldson, Lufkin & Jenrette Inc., and Suretrade, of Fleet Financial Group Inc., had record trading volume, driven in part by interest in Internet stocks.
Raymond James Associates Inc. analyst Phil Leigh said he might change his forecast for ETrade to a loss of 30 cents in the fiscal first quarter ended Dec. 1 and a loss of 60 cents a share in fiscal 1999 because of his expectations for good trading revenue.
The company earned 16 cents in the year-ago first quarter and lost 33 cents in fiscal 1998.
Leigh said he could see ETrade's quarterly loss narrow to anywhere between 30 cents and 14 cents. He had forecast a 14-cent loss up until October, when he changed his earnings because of the stock market plunge. He expects the company's operating expenses, which include advertising and promotions as well as technology, to come in at $58 million in the first quarter, down from $62.6 million last quarter, $37 million of which went to sales and marketing.
Other analysts are also taking a kinder look at ETrade's prospects for fiscal 1999. First Call Corp.'s estimate is now for a loss of 44 cents, narrower than the 60-cent loss that had been the consensus earlier this week.
Many analysts expect growth in both trading revenue and profits for Schwab, with First Call projecting fourth-quarter earnings of 33 cents a share. The company earned 23 cents a share in the year-ago quarter, including charges.
Schwab's daily average revenue trades actually increased in October to 101,200 from 96,400 in September and August's 99,600. The strong trade numbers surprised some observers, who had reasoned that the smaller online investors who converted to Internet trading amid a consistently rising market would flee, given the global market turmoil.
Still, advertising and technology costs will undermine earnings for Ameritrade.
"There is no question that (online brokerages) should have good earnings, but keep in mind that you have ETrade spending a lot of money on advertising and you have Ameritrade spending a lot of money in their back office on capacity issues," ABN AMRO Inc. analyst Scott Appleby said.
Appleby and other analysts lowered earnings expectations for Ameritrade earlier this week after Chairman and Chief Executive Joe Ricketts told analysts technology and advertising costs would be high. Ricketts said earnings for the first fiscal quarter ended Dec. 30 would be 6 cents to 7 cents, lower than analysts' then-consensus forecast of 11 cents. The company lost 77 cents in the year-ago first quarter.
He also said ad spending would be about $10 million this quarter and about $20 million to $30 million in the second quarter.
Credit Suisse First Boston Corp. analyst Bill Burnham said that based on these numbers, he estimates the year's ad spending to be between $70 million and $100 million, up from the $50 million to $60 million he had anticipated.
Lowering earnings forecasts is related only to spending on technology and advertising, analysts say, and they are sticking by expectations for Ameritrade's trading revenue to grow significantly from last quarter's $39.6 million.
With the Dow Jones Industrial Average having rebounded sharply off its early October lows and seen ranging around its current level until the end of this year, analysts say that this hasn't and won't be the test quarter for the online trading industry, as they had expected.
Shares of online trading companies have come back sharply from their lows in early October. E-Trade shares closed Thursday at $23.18 3/4, up from $12.93 3/4 on Oct. 7; Schwab ended at $54.31 1/4 on Thursday, compared with a close of $35.06 1/4 on Oct. 7; while Ameritrade finished Thursday at $19, up from $14.25 on Oct. 7.
"It seems like there was a bit of unattractiveness, but they certainly have not been tested," said Michael Gazala, an analyst at Forrester Research Inc., a Cambridge, Mass., market-research firm.
"Even within all this volatility, there are some sectors that perform very well and companies that perform very well," Gazala said, allowing investors to continue making money.
Gazala warned, however, that when the market does go into a prolonged correction, the online traders will again be put to the test.