How SSB arrived at its $21 Price target...
TWE is trading at a substantial P/EBITDA discount to SCH despite faster historical growth. Applying 75% of SCH's 2000E EBITDA multiple to TWE's 2000E EBITDA yields a target price one year out of $21.
And some other stuff on TWE's value...
TWE has grown key variables (accounts, client assets, revenues, earnings) faster than SCH over the past three years, coming from a much lower base. The number of active accounts grew at a 47% compound rate over the three years 1995-1998, while SCH's grew at 18%; this drove client asset growth at TWE at a 50% rate, when cash flow to existing accounts and market growth are factored in. The comparable figure for SCH was 39%. Revenue growth over the period was at a 34% rate versus SCH's at 24%. Meanwhile, pretax and net income growth were comparable, at 27%-28% for both firms. A complicating factor in the comparison is goodwill amortization. Because TWE made two substantial acquisitions over the period; the firm's goodwill amortization charges went from a negligible $1.6 million in 1995 to $33 million in 1998. However, last year, even with an increase in goodwill amortization from $21 million to $33 million, TWE's net income grew 35% to SCH's 29%; and if goodwill is excluded, earnings grew 41%. We believe the online/discount business, and TWE specifically, can continue to grow robustly, given attractive U.S. and Canadian population demographics, a relatively low penetration of customer assets, and the fact that TWE still has only half as many U.S. branch locations as SCH. |
