Gary, Are you having any problems accessing research on MLOnline?
Bob,
I can't access the 9/17 report on NITE. I can access everything else on NITE and on other stocks. Curious.
However, I just found the 9/17 MER report posted on YHOO. Here it is:
Merrill Lynch 9/17/99 on NITE -Part 1/2
by: nite_super_long 85953 of 85956
Investment Highlights:
ú NITE's presentation at the ML's investor
conference focused on core strengths of the
company in terms of technology prowess, scale
benefits, and best in class trade executions.
ú Mgmt also addressed opportunities from
leveraging growth in online investing, growing
its institutional business, and expanding
internationally and in options market making.
ú Mgmt confirmed that 3Q trading volumes are
softer and added that volatility is low,
implying reduced revenues per trade.
ú While still dominant in Nasdaq/OTC market
making, NITE's market share has decreased
from 18.2% in 2Q to 16.2 % in 3Q so far.
ú We are lowering our 1999 estimate from $1.60
to $1.50; our new 3Q estimate is $0.35; our
2000 estimate is trimmed from $1.95 to $1.80.
ú Due to reduced estimates and higher interest
rates, our DCF-derived 12-18 month price
objective is now $50.
ú We reaffirm Accumulate/Buy rating and
stress our High risk (D) rating given NITE?s
earnings volatility.
A Positive Presentation
At the ML Banking & Financial Services Conference,
NITE's CEO, Ken Pasternak, delivered a positive message
directing investors attention to the firm's core strengths in
terms of technology prowess, scale benefits, and best in
class trade executions. Mgmt also addressed opportunities
from leveraging growth in online investing, growing its
institutional business, and expanding internationally and in
options market making.
Lowering Estimates
Mgmt confirmed that 3Q trading volumes are running
slower than usual and that the company is experiencing
lower volatility among stock trades, implying a lower
generation of revenues per trade. We attribute this lower
volatility to seasonal weakness in retail activity,
particularly in the small-cap and OTC bulletin board
market in which volumes have declined about 30% vs. 2Q.
We note, however, that 3Q OTC bulletin board volumes
are running higher than 1Q levels. Though the firm is
maintaining its market shares in respective market value
classes (large-cap, small cap, OTC bulletin board), we note
that its overall market share of Nasdaq/OTC volume has
suffered due to lower small cap volume. Specifically,
NITE's market share declined from 18.2% in 2Q to 16.2%
in 3Q thus far, according to AutEx data.
Due to lower trading volumes and volatility, we are
lowering our 1999 earnings estimate from $1.60 to $1.50
p.s. Our new 3Q estimate is $0.35 p.s. We are also
adopting a slightly more conservative approach in
forecasting 2000 EPS. We are assuming a slower
improvement in market shares due to the unpredictability
of small cap trading volumes that can cause fluctuations of
its overall market shares. Accordingly, we are lowering
our 2000 earnings estimate from $1.95 to $1.80 p.s.
We maintain our Accumulate/Buy rating, as we believe the
firm is able to leverage the growth in online investing and
scale benefits should keep pretax margins in the high 30%
range. However, we stress our High risk (D) rating based
on NITE's high earnings volatility. We now see a 12-18
month price objective of $50 based on our DCF model.
Reasons For Positive Rating
We see 3 reasons supporting our positive rating:
1. The firm appears well positioned to leverage the
growth in online investing: NITE has strong tries to
major online brokers directing significant amounts of
order flow to the firm. NITE's order flow contribution
from its top 5 customers have increased form 33% of
total volume in 1998 to nearly 40% in 2Q99. Also,
with its large capacity of executing trades and by
making a market in approximately 18,500 listed and
OTC stocks, the firm captures about 10% of its
orderflow from competitors' overflow of orders. In
addition, we believe NITE has opportunities to grow
its market share late next year when decimalization of
stock exchanges could cause competitors to make
markets in fewer stocks.
2. The firm is actively diversifying its business:
Currently, NITE is actively growing its institutional
business, which we estimate to be twice as profitable
as its retail business. The firm is also expanding its
business model internationally and is employing
moves into the options market making business.
3. NITE has a highly profitable business model:
Though NITE's earnings can be volatile, the firm's
growth prospects coupled with scale advantages
should maintain high level of profitability.
Specifically, we see long term earnings growth of 20-
25% and sustainable ROEs above 30%. Also, we
believe NITE can maintain pretax margins in the high
30% range.
Risks
Though we remain positive on the growth prospects of
NITE, investors should be aware of 2 main risks:
1. The firm faces high earnings volatility due to
competitive forces and dependence on trading activity.
With NITE particularly dominant in small cap issues,
we believe that a significant dry-up in retail trading
activity would force the firm to be more dependent on
large cap issues which are becoming increasingly
competitive due to more market makers per issue as
well as ECNs gaining popularity. To illustrate, small-cap/
OTC bulletin board volumes fluctuated from 25%
to 50% of NITE's total Nasdaq/OTC volume during
the last 4 quarters, according to NASD.
2. Beneficial holder selling remains a lingering issue.
Since the lockup expired in July, we estimate that
about 3-4mm of the 67mm shares held by mgmt and
broker dealer owners have been sold. Though we
believe that shares will continue to be sold in a
controlled manner, we cannot rule out the possibility
that broker dealer owners step up selling, particularly
when online brokers could find NITE shares as an
attractive funding source for technology and
advertising spending. |
