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STREET WISE By Sam Jaffe July 8, 1999


A Net Brokerage Pioneer Rejoins the Front Ranks
National Discount Brokers revamped its Web site -- and now the stock has hit investors' radar screens

If you had asked any Internet consultant five years ago which industry might have trouble making the jump to the Internet, brokerages would have been high on the list. At the time, the fear of security breaches and hackers was too intense for investors to trust their stock trades to the Web. And how could the Net replace that warm feeling that came with a broker's cold call? Could a dumb computer do that?

Well, yes. Just a few years into the E-commerce revolution, few industries have been turned on their head more than the brokerage business. Firms that didn't even exist five years ago, such as Ameritrade (AMTD) and E*Trade (EGRP), are among the most prominent Net players today. Heavyweight full-service brokers such as Merrill Lynch and Morgan Stanley Dean Witter (MWD) are desperately playing catch-up by belatedly launching their own online services or paying outrageous premiums to buy existing ones as clients defect en masse to online upstarts and their lower trading fees.

This year an average of 503,000 trades are being executed every day online, not including trades from day-trading firms. Online trading now accounts for 35% to 40% of all retail trades on the stock markets, according to estimates from BancBoston Robertson Stephens. Both figures are about one-third higher than they were a year ago.

LILLIPUTIAN VALUATION. The sad news for investors who failed to get in on the ground floor has been this year's runup in the prices of online brokerages. E*Trade's stock has risen 114%, despite a 35% drop during the April correction in Internet stocks. Most other online brokerage stocks have enjoyed big increases this year, ranging from a positively mundane 79% jump for Charles Schwab (SCH) to a jolting 443% spike for Ameritrade.

One stock that has been pretty much left out of the party so far has been National Discount Brokers (NDB). True, its stock has jumped 114% so far this year. But it still has a price-to-earnings multiple of 48, a Lilliputian valuation compared with its bigger rivals. Market leader E*Trade boasts a p-e of 315, based on its anticipated earnings in 2000, while Ameritrade is floating on a 1999 p-e of 102.

Even by the increasingly popular measure of Net stock performance called price-to-revenue, NDB looks like a bargain. Its ratio is 2.7, while E*Trade's is 17.5. "NDB is the one company in the group that has a comfortable upside," says James Marks, an analyst with Deutsche Bank Alex. Brown, who rates the stock a strong buy. "Plus, it's trading at an 80% to 90% discount to its more well-known peers."

So why is NDB so cheap? It was a pioneer among discount brokerages. In fact, it was one of the first, back in the '70s, to offer flat-rate trading commissions. It even took an early lead over its competitors when the Internet became a viable stock-trading medium. But it quickly lost its technological edge to swifter competitors such as E*Trade and Schwab -- and gained a premature reputation as road kill.

 

A $100 million debt deal will give NDB the power to launch a nationwide marketing campaign
 

Those problems have now been solved. Last month, NDB launched a new Web site that matches every other brokerage site's features. It now has as many research reports available as Schwab, as speedy a transmission time as DLJdirect, and as elaborate a charting system as E*Trade. The critics have noticed. Money magazine declared NDB's the second-best online brokerage site. Gomez Advisors, a ranking service, moved it from No. 19 to No. 2, after E*Trade. "They've put together a very nice site," says Dan Burke, the senior brokerage analyst with Gomez Advisors. "They are very consistent, and they offer a lot of good research tools."

The company hasn't yet said how many new accounts the redesign has helped attract. Those numbers should come out later this week, when NDB reports its quarterly earnings. No matter what the tally is now, the number is likely to improve soon since NDB recently concluded a $100 million debt deal, which will give it the power to launch a nationwide marketing campaign. Similar ad blitzes created the Ameritrade and Discover brokerage brands. NDB hopes that it can create the same sensation, especially now that it can boast of critics' praise.

 

NDB's "new product is arguably the best on the Internet right now," says Tim Klein of U.S. Bancorp Piper Jaffray
 

The buzz is finally making its way to Wall Street. A month ago, NDB had no analyst coverage. Since then, in addition to Deutsche's Marks, Tim Klein, an analyst with U.S. Bancorp Piper Jaffray, has picked up the stock. He, too, rates it a strong buy. "From a pure valuation standpoint, NDB is trading at a great discount," says Klein. "And the company's new product is arguably the best right now on the Internet." Such reviews have already helped the stock gain 25% in the past two weeks. Both Klein and Marks feel that there's a lot more gas left in NDB's engine.

The real key for NDB, though, is its next earnings report. The company reported 58 cents per share last quarter. The latest quarter's earnings should be lower because of the cost of revamping its Web site -- and if the company earns less than 50 cents a share, the stock could fall. But investors are hoping for at least a modest rise in new accounts for the quarter. And if that happens -- and if earnings are pleasantly strong -- a new Net-stock darling could be born.

Sam Jaffe writes about the markets for Business Week Online.


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WEB POINTERS
To visit the sites mentioned in the story, click here:
NDB
E*Trade
Ameritrade
Charles Schwab
DLJdirect
Discover


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