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

To: zurdo who wrote (4916)	10/12/1999 11:48:00 AM
From: Platter	Read Replies (1) \| Respond to of 10027

Knight/Trimark: Too Cheap to Ignore individualinvestor.com David Peltier (10/11/99) Knight/Trimark (NASDAQ: NITE - Quotes, News, Boards) made it official this morning -- the third quarter is going to fall well short of expectations. The market maker warned that its quarterly profit will be between $0.17 per share and $0.19 versus the already-reduced consensus estimate of $0.30 per share. CEO Kenneth Pasternak stated 'there were decreased trading volumes and greater than expected seasonality in the marketplace.' Internet trading was down 5% to 10% for the third quarter, and Knight receives approximately 40% of its business from online brokers. Like this Article? Analyst Sean Chin of Merrill Lynch cut his near-term rating on Knight/Trimark to 'neutral', while maintaining a long-term 'buy' recommendation on the stock. Despite the enormous shortfall, Knight is expected to report revenue of $138 million, 49% better than the prior year. Profits will also show a greater than 40% increase. These numbers pale in comparison to prior quarters however, where 200%-plus growth was achieved when the markets were soaring. We recommended Knight/Trimark at $52 per share -- 36% off its highs. At the time it was thought that the company could stand tall against further selling in the e-brokerage industry. Today however, you can buy those same shares for $25.56, after today?s 15% drop. There were a few reasons why Knight's stock has persistently sold off. The most obvious has been the market maker's association with online brokers, who own about 20% of the company and still account for about 40% of its transactions. Charles Schwab (NYSE: SCH - Quotes, News, Boards), Ameritrade (NASDAQ: AMTD - Quotes, News, Boards) and ETrade (NASDAQ: EGRP - Quotes, News, Boards) were all cut by more than 50% over the summer. Many investors claimed that summer volume was just seasonably light and would pick up in the fall. Well, a few rate hikes later, trading volume and volatility have yet to pick up from the summer. As a market maker Knight/Trimark thrives on market volatility, especially as trading volume increases. The company makes the bid/ask spread by fronting its own capital to execute trades on the market. When Knight went public last year, about 60% of the shares were owned by Knight management and the online brokers that first created Knight. There was a one-year lockup period in which these 'insiders' could not sell their shares. Even given the stock's turbulent ride, shares are up over 300% from their IPO price. Insider profit-taking was inevitable, but the brokers especially have unloaded a good amount of shares. Don't be too worried though, these brokers have $1 billion in advertising to pay for, and management still owns a significant 29% of the shares outstanding. While Knight's stock price has fallen drastically, its strategy and fundamentals remain strong -- in fact, we think that they've gotten even brighter. In July the company took a 19% stake in the EASDAQ, a European market system similar to our domestic Nasdaq. While the $8 million investment is small, Knight and its partners (including Goldman Sachs and Morgan Stanley Dean Witter) are positioned to coagulate a highly segmented market. The investment could be extremely lucrative for Knight, which already has a European presence with its London office. Knight has also switched over to use Merrill Lynch (NYSE: MER - Quotes, News, Boards) for the clearing of its trades. Knight management said that the deal would save the company 6 cents a share for each trade it makes. Given the company's current volume, this will add 4 cents a share to the bottom line each year. Knight's third quarter results will hamper the stock's performance for the rest of the year. A lot of investors have by now realized the company's long-term potential, as chronicled on our message boards. In its short existence and meteoric rise to $81 per share it has rarely known slow times, and people want to see how much leverage Knight's business model can squeeze out of sequentially lower trading volumes. Investors will be looking to the earnings reports from online brokers such as Schwab and ETrade due later this week, to see how well they handled the slow quarter. Eight out of nine analysts continue to rate Knight a long-term buy, and published 12-month price targets range anywhere from $58 to $98. Charlotte Chamberlain of Jefferies & Co. told us that Knight 'is the best buy in the e-brokerage sector-- the company is already profitable.? As for the online broker/owners selling, she assured us that they have no reason to look elsewhere for their trade execution. With over $250 million in cash and no debt on its balance sheet, look for Knight to be making some more acquisitions -- possibly kick-starting the company's desire to start an options exchange. At $25.56, Knight/Trimark is trading at a mere 19.7 times the Street's fiscal 1999 earnings per share estimate of $1.30 per share. Knight is trading at a gross discount to its earnings potential, considering management said that the company will continue to post at least 30% growth year-over-year. After it clears the hurdle of its third quarter earnings, the road ahead looks very clear for Knight. Bottom Line: Market volume has been anemic, but isn't dead. Knight/Trimark is the largest and most efficient market maker and its recent strategic moves have made the company less dependent on its online trade clearing. The company will prove in the following quarters that its business model will succeed even in slow times.