Online Brokerage Firms Hit a Headwind

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April 23, 2010

Schwab set the tone, and other online trading brokerage houses followed suit with pretty tepid first quarter results. Were it just one aspect of revenue-bearing business or another, it may be forgivable. Not much went right for these brokers last quarter though, and the foreseeable future (i.e. growth) doesn’t look much better.

An early warning: The writing was on the wall when Charles Schwab Corp. (SCHW) posted Q1 results last week. Not only were profits nearly cut in half, but the 10 cent earned per share was a penny short of estimates. The most alarming part of last quarter’s results, however, was the 12% dip in revenue despite 36% more customer assets - the sum total of money being held for investors by the brokerage firm – compared to the same quarter a year earlier.

Said in simpler terms, Schwab is doing less with more…. and a lot less, where earnings are concerned.

Following suit: If it were just Schwab, we might be able to chalk the rough quarter up to bad luck, or something company-specific. It wasn’t just Schwab though.

Interactive Brokers (IBKR) saw a 70% dip in year-over-year earnings thanks to a 28% decline in revenues. TradeStation Group (TRAD) beat EPS estimates of six cents by actually earning seven cents, but either would have been disappointments compared to last year’s eleven cents.

On the other hand…: There were a couple of bright spots too, even if dubious. E*Trade (ETFC), for instance, managed to shrink its Q1 loss from $0.04 last year to $0.02 this year. And, TD Ameritrade (AMTD) reported a 21% increase in earnings relative to last year.

Even so, E*Trade is still taking losses with no real relief in sight, and had it not been for a tax/accounting benefit, TD Ameritrade’s earnings would have actually been flat. Worse, Ameritrade reeled in its 2010 outlook at the same time it unveiled last quarter’s numbers. TradeStation lowered its second quarter outlook as well.

When OptionsXpress (OXPS) posts Q1 numbers on the 27^th, don’t look for wildly different results.

What’s going on?: How did the outlooks and estimates get so far ahead of results that now they’re being lowered while every other industry seems to be on fire? There are two factors at work here….. one that’s completely in the past, and one that may nag at these names for a while longer.

The former is simply an unfair comparison to Q1 of last year. While the market may have been hitting a bottom in the first quarter of 2009, it was only doing so because of a massive wave of trading (commission-generating) activity…mostly selling, obviously. Since that comparison will no longer be in play, however, the now/then disparity won’t create forecasting problems.

The second factor is likely to still be at work though, and could affect future quarters.

As the market rebounded in the last three quarters of 2009, trading activity was quite firm. But, the second year of a bull market (2009 was the first year) is rarely as active as the first. Analysts and brokerage firms - usually operating under the assumption that the status quo never changes - based 2010’s outlooks on 2009’s trading. Now that trading activity is cooling off indefinitely, those lofty goals are looking more and more out of reach.

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