[B] Knight/Trimark sees strong long-term growth despite slower Q3 --
By Cameron Dueck, Bridge News
New York--Oct 8--Lower third-quarter trading volumes and volatility are
expected to leave a mark on the financial results of the online brokerage
industry. Knight/Trimark Group Inc., a leading market maker for Nasdaq stocks,
is also expected to feel the impact, and analysts have been lowering their
estimates in preparation.
* * *
Jersey City, N.J.-based Knight/Trimark has become one of the favorite
success stories among the electronic trading crowd. The company in its present
form is only 4 years old, and it has seen explosive growth, fed by the boom in
online and retail investing.
While most analysts, and the company itself, reassure investors that the
success story should continue over the longer term, the third quarter could
temporarily pull the company out of the clouds.
Kenneth Pasternak, Knight/Trimark's president and chief executive officer,
told Bridge News that while third-quarter earnings will be down from the second
quarter, year-over year growth shows the company is going strong. While the
trading boom in the second quarter produced stellar results for the firm, the
third quarter activity has fallen below projections.
"The second quarter on its own would have been a good year for us, and we
thought after that the market would have to take a breather, and that that kind
of growth would be unsustainable," Pasternak said.
Pasternak said the fall in volumes hit Knight/Trimark harder than the
average market maker because of its reliance on retail Internet investors. He
said private investors tend to withdraw from the market and sit on the sidelines
sooner than institutional players do during market downturns, so when the stock
market, and particularly the technology sector, faltered this summer,
Knight/Trimark's volume shrank.
However, Pasternak said the firm is still on track for strong year-over-year
growth regardless of the third quarter's lower-than-expected performance.
"Our year-over-year trend is still very good and our overall activity is
going up, so on the longer term we're very healthy," he said.
In fiscal 1998, the firm saw 57% growth in revenues and 76% growth in
profits.
Pasternak said while 100% year-over-year volume growth is becoming harder to
produce as the company grows and matures, he is confident the company will
maintain this growth for the third quarter and for fiscal 1999.
Knight/Trimark reported 323.7 million average daily trades in the first half
of 1999, up approximately 142% from the year-ago level. In the third quarter of
1998, the firm reported average daily trades of 164.0 million, which implies
Knight/Trimark could see an average of approximately 328.0 million trades per
day in the third quarter.
ANALYST ESTIMATES FALL
First Call's latest consensus analyst third-quarter earnings estimate is 30
cents per share, which is down from 40c on Aug 24.
While earnings expectations are falling, at the current level this figure
still represents strong year-over-year growth, with a net profit of 13c per
share in the third quarter of 1998. However, Knight/Trimark, like much of the
online brokerage group, is likely to fall short of the high-water mark set in
the second quarter, with earnings of 43c per share.
The company is expected to report its third quarter results on Oct 20.
Charlotte Chamberlain, analyst at Jefferies & Co., recently lowered her
third-quarter earnings estimate to 26c per share from 32c, saying that "lower
market volatility has narrowed (Knight/Trimark's) gross trading margins to a
greater extent than we anticipated."
However, Chamberlain believes Knight/Trimark's earnings will rise into 2000
due to a its clearing alliance with Merrill Lynch & Co. and the marketing being
done by its online broker clients.
Gregory Smith, analyst with Hambrecht & Quist, lowered his third-quarter
estimate to 25c per share from 33c, and he also dropped his 2000 estimates.
"Despite current weakness, Knight/Trimark is still a very valuable franchise
with a bright future," Smith wrote in his report. "Unfortunately, the company
became caught up in a momentum tornado and is now feeling the pain of plummeting
back to earth. As Knight/Trimark was flying high, investors failed to discou
nt the potentially high volatility of the company's earnings stream."
Knight/Trimark's shares have been lagging in recent months, dropping from
the 52-week high of 81 5/8 in May to its current trading range around 30.
COMPANY PLANS TO EXPAND
Knight/Trimark has a considerable amount of cash and cash
equivalents--$265.7 million as of Jun 30--but this money is unlikely to go into
a share repurchase program to shore up share values.
"I think there is better shareholder value to be found by building and
buying compatible businesses," Pasternak said.
Pasternak said the firm will likely buy a US options market maker by the end
of the year, but when it comes to growing internationally, it will build from
the ground up.
"We won't be buying in Europe, we'll be building, because frankly there's
nothing to buy," Pasternak said.
Tim Butler, analyst with Pacific Crest Securities, said Knight/Trimark's
additional securities assets of $201.8 million make acquisitions a distinct
possibility in the near future.
"They have a significant war chest in addition to their market securities
and highly liquid investments," said Butler. "We think that they could use that
to be inquisitive." End |
