Wall Street Greets Instinet Price Cut With Lowered Views
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Wednesday March 13, 5:18 pm Eastern Time
By: Gaston F. Ceron, Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- A decision by Instinet Group Inc. (INET) to lower prices on its stock-trading service led to a round of earnings-estimate cuts by Wall Street analysts.
The lowered profit outlook put more pressure on the New York company's already-depressed stock price. Instinet shares fell 9.2% Wednesday after shedding 6% on Tuesday, when the price cuts were unveiled. In 4 p.m. Nasdaq Stock Market trading,ADVERTISEMENT
Instinet stock was down 70 cents at $6.94.
The lower prices are intended to shield Instinet's Nasdaq stock-trading business from competitive and business pressures. But some on Wall Street see a negative side: Merrill Lynch & Co ., for example, downgraded its long-term rating on Instinet shares to neutral from buy "due to deteriorating profitability from aggressive price cuts as well as anticipated intensifying competition."
Instinet Chief Executive Douglas Atkin said in an interview Wednesday he thought the price cuts will help Instinet's market share. Atkin said he feels " very strongly" that the moves Instinet has been making are necessary "even if they cause some short-term pain."
The price cuts arrive amid a trading environment that is still feeling the pinch of the stock-market slump and last year's switch to trade stocks in one- cent increments. That move has hurt trading profits at brokerage firms that deal in Nasdaq stocks, an important customer group for Instinet. Given the business conditions, price "has asserted itself as a significant concern for broker- dealers," said Atkin, in a statement announcing the cuts.
Moreover, there is no shortage of competition. One of Instinet's largest rivals, Island ECN Inc., of New York , recently lowered prices for users of its stock-trading network. Since last year, Instinet also has been feeling the heat from a trading system unveiled by Nasdaq itself, SuperSoes. And another potential threat is just around the corner, as Nasdaq prepares for the summer launch of the next upgrade of its stock-trading systems, to be known as SuperMontage.
All this has come as investors are still getting to know Instinet. The company, which is majority-owned by Reuters Group (NasdaqNM: RTRSY - news) PLC (RTRSY) has been around since 1969, but was partly spun off in an initial public offering of stock last May. That IPO valued Instinet at $14.50 a share; the stock soon shot up to as high as $21.75 but has since come down.
Instinet has reacted to its challenges by implementing a three-pronged strategy to bring down its costs: roll out new trading products and services and defend its market share in Nasdaq trading.
With this in mind, Instinet on Tuesday unveiled its second round of price cuts this year. The cuts lower the average Nasdaq trading rates paid by Instinet's broker-dealer clients by at least 60% and also simplify the company's fee schedule, Instinet said. The price changes include improved rebates for traders that supply orders to Instinet's system and are expected to help Instinet compete more aggressively for trading in exchange-traded funds, the company said. (ETFs are popular securities that resemble mutual funds, but trade like stocks.)
But while the price cuts may give a lift to Instinet's market share, analysts are still concerned about its profits. Merrill Lynch and Putnam Lovell Securities, for example, brought down their targets for Instinet's future earnings: Merrill now expects Instinet will earn 34 cents a share in 2002, down from an earlier estimate of 50 cents; Putnam Lovell lowered its estimate to 36 cents a share in 2002 from 55 cents.
"While we believe that the price decline could result in a modest uptick in the company's near-term Nasdaq market share, we believe further price competition is likely," said Putnam Lovell analyst Richard Repetto.
Atkin, who noted that Instinet has also been taking steps to improve its trading technology, said he expects Instinet's strategy will pay off in the second half of this year. As far as the pressure on revenue that the price cuts could cause, Atkin said, "I view my job as managing the tradeoffs between this quarter's earnings, and next year's earnings and the earnings five years out."
Another analyst who follows Instinet, Stephen Laws of W.R. Hambrecht & Co ., also lowered his estimates on Instinet's earnings. Instinet still faces " negative catalysts" in the short term, but Laws said he thinks the company now " has the pricing in place to allow it to compete more effectively with its smaller cost-base competitors" and said he expects "future price cuts, if any, will be much less severe."
Meanwhile, Merrill analysts said they expect pricing pressures are likely to continue to weigh on Instinet and did not dismiss the possibility that the company could have to lower fees again "if market share fails to develop." Merrill, which along with Hambrecht was among the underwriters of Instinet's IPO, kept its intermediate-term rating on Instinet shares at neutral.
For his part, Atkin wouldn't say how likely it is that further price cuts will materialize, but said Instinet will fight hard for its broker-dealer customers. "We want their business to be traded at Instinet," he said. -Gaston F. Ceron; Dow Jones Newswires; 201-938-5234; gaston.ceron@dowjones.com
(This story was originally published by Dow Jones Newswires) |
