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Non-Tech : Knight/Trimark Group, Inc. -- Ignore unavailable to you. Want to Upgrade?

To: gbh who wrote (4048)	9/16/1999 5:24:00 PM
From: Gary Korn	Read Replies (1) \| Respond to of 10027

** Hambrecht & Quist Hambrecht & Quist Hambrecht & Quist ** Company: Knight/TrimarkPrice: 30.63Recommendation: Market PerformNotes: Date: 9/16/99INITIATING COVERAGE WITH A MARKET PERFORM RATING * Knight/Trimark is the leading provider of wholesale equity liquidity * Weak 3Q volumes may pressure the stock over the near term but outlook remains favorable * We believe market makers and electronic trading platforms can comfortably coexist* Establishing EPS of $1.46 for 1999 and $1.72 for 2000. 1998 A 1999 E 2000 E Q1 EPS $0.10 $0.34A $0.40 Q2 EPS 0.14 0.43A 0.42 Q3 EPS 0.13 0.33 0.44 Q4 EPS 0.17 0.36 0.46 FY EPS 0.54 1.46 1.72 FY REVS (M) 356 802 958 CY EPS 0.54 1.46 1.72 CY P/E 57 21 18 FY Ends Dec Current Price $30.63 52-Week Range $81-2 Market Cap (M) $3,558 Shares Out (M) 116,168 Book Value $3.18 Net Cash/Share $2.29 3-Year EPS Growth 20% CY00 P/E-to-Growth 1.01 Initiating Coverage. We are initiating coverage of Knight/Trimark with a Market Perform rating and establishing 1999 and 2000 EPS of $1.46 and $1.72, respectively. Trading today at only 18 times our 2000 estimate, we believe NITE offers investors a solid long term opportunity to participate in the continued volume growth of U.S. equity markets. However, due to the high visibility of the recent flurry of activity among electronic trading platforms and relatively weak third quarter volumes, we believe there may be further near term pressure on the stock price. We prefer to wait for a better entry point before jumping on board. Current Quarter. Our 3Q99 EPS estimate for Knight/Trimark is $0.33, up a whopping 154% from a year ago, but down sharply from $0.43 last quarter. We expect the market-wide decline in equity volumes during the third quarter to result in a sequential revenue decline for the company. Assuming Knight/Trimark hits our numbers, the third quarter will break a string of five straight quarters of sequential revenue increases. The Leading Wholesale Liquidity Provider. Knight/Trimark's growth has been nothing short of startling. Since 1995, Knight's market share of advertised Nasdaq volume has grown from nothing to a staggering 17.5%. Just a year ago, market share stood at 10%. Today, Knight Securities is the leading Nasdaq market maker while Trimark is the leading market maker of listed securities in the Third Market. Knight's revenues have grown from $185 million during full year 1996 to $224 million during 2Q99 alone! Rising revenues combined with substantial margin expansion through economies of scale set the stage for explosive earnings growth. Knight's pretax margin has expanded from 20% in 1996 to 38% during 2Q99. We expect net income to reach $174 million in 1999. Formed less than five years ago, Knight/Trimark has come out of nowhere to become the largest U.S. market maker. Through its wholly owned subsidiary Knight Securities, the company makes markets in approximately 7,100 equity securities in Nasdaq and on the OTC Bulletin Board of the NASD. Through its wholly owned subsidiary Trimark Securities, the company makes markets in all NYSE- and AMEX-listed equity securities in the Third Market. As the single largest execution destination for online retail order flow, Knight/Trimark has experienced significant growth since the company's recent inception. The dynamic changes affecting the retail brokerage industry over the past few years and the market environment ó characterized by heavy volumes and volatility ó have played directly into Knight/Trimark's strengths. The company intends to expand its domestic market making operations by attracting more institutional and international order flow, and the company is looking to diversify its market making capabilities into other domestic and even international securities, beyond its core equity expertise. Knight/Trimark is an example of the survival of the fittest. While other broker dealers have been scaling back their market making activities, Knight has been scooping up market share. Since the advent of the SEC's Order Handling Rules and the quoting of sixteenths, Nasdaq spreads have fallen dramatically. This has caused a profound shift in the market making business. No longer can market makers rely purely on earning the spread between the bid and ask. Scale, technological prowess, and innovative trading methodologies controlling inventory management over longer time horizons have emerged as the keys to profitability. In this environment, Knight/Trimark has thrived. While Knight has skillfully navigated its way to the top today, the road ahead is shrouded with fog. Electronic trading systems have emerged as viable sources of liquidity. The exchanges themselves are considering sweeping structural changes. The captive order flow arrangements of the past are under pressure. Spreads should continue to fall due to natural competitive pressures and the implementation of decimalization. In order to attract order flow, market makers must look for new ways to add value. We believe Knight/Trimark will be a survivor. Market making is a scale business and Knight is at the top. No single execution destination handles as many Nasdaq market and limit orders as Knight does. With greater scale comes the ability to offer unique products and services. Knight is continually finding new ways to outdistance itself from the competition. While we expect electronic trading systems to continue to gain market share of overall volume, the role of the market maker (in one form or another) will always be necessary in order to maintain a fluid, liquid market. We expect the floor-less, virtual markets of the future to be entirely screen-based with a combination of computer-driven matching and the necessary capital injection coming from market makers in the absence of natural liquidity. We expect Knight/Trimark to continue to gain market share of overall volume, as the company's deep pool of liquidity and knowledge proves too irresistible to ignore. The combination of strong equity market volumes, high volatility, and growing market share should allow Knight/Trimark to continue to prosper. The immediate threat of disintermediation is overblown. Weak market makers who lack the technology and service capabilities to attract and profit from order flow in the changing environment could fall by the wayside, leaving Knight standing tall. Looking out over the next five and ten years, new technologies could easily make much of the human element in the market making business obsolete. As information flows more freely and the globalization trend continues, the markets should become even more efficient although volatility is likely to continue to rise as the markets adapt even more quickly to new information. In the market making business, sophisticated computer driven trading methodologies may replace the knowledge, skill, and intuition of a seasoned human trader who cannot keep up with the pace of change. It is too early to tell how this could change the profitability dynamics of Knight/Trimark's business, but if the current, long-term trend of declining profits per trade is any indication, there is reason for caution. Along with every other broker and market maker, we expect Knight to continually fight the balance between higher volumes and lower unit profits. So far, Knight is winning the battle. For a more complete analysis, please see our forthcoming report on the Electronic Brokerage industry.