Now for some number crunching. They just reported earnings last week. For the 3Q ending 9/30/2008, net income increased 7% over 3Q 2007, revenues increased 10%, total market share for options trading increased 1% to 3.4% and client assets increased 43% to $3.12 Billion, however October assets fell to $2.82 Million. I'm sure other houses saw a big decline in assets during the financial crisis and perhaps capital was shoved into gold bullion. The client asset number should be watched closely on a monthly basis. OptionsXpress lost assets in September. "Competitor optionsXpress Holdings Inc. saw its client assets fall 7 percent to $5.3 billion at the end of September from $5.71 billion three months earlier." (Source: AP).
Shareholders equity increased 33.7% to $216.5 million from 12/31/2007 and debt levels were sound, however cash flows from operations were down 35.6% to $14.185 million from $22.046 million due to increased deferred revenues, receivables, accrued tax liabilities and a net decrease of cash from the 'other assets' line. Investor education revenues took a hit decreasing 27.6% compared to 3Q 2007 so that should be watched. It looks like they lowered prices. Net margin stayed around 20% compared to 3Q 2007. Review the slides and 8K for their Adjusted EBITDA yoy comparisons and margins. Here are some interesting observations of their performance from their earnings call presentation.
The chart of $SWIM ytd looks horrible, it was down 66% ($18 to $6) before seeing a bounce in October. During April of 2008 shares plunged due to an SEC inquiry of their investment seminars, "Shares Plunge On SEC Inquiry, Earnings Miss". This risk was probably being priced into the stock. If something happens with this it could have a "material adverse impact on the company's liquidity position" (10Q, 6/30/08, pg 16). It wasn't even mentioned on the most recent conference call though.
Here's a quick Price/Sales valuation I came up with based on historicals and competition comparables. I'm going to use Msn money data for thinkorswim's historical Price/Sales ratios. From 2001-2007 their annual P/S ratios (0.37, 0.18, 1.01, 1.58, 1.75, 3.65, 3.67) averaged 1.74. As of today's close (11/4), using S&P data via Yahoo Finance, SWIM's P/S ratio is 1.35, and the average P/S ratio for thinkorswim's direct competitors (SCHW, OXPS, AMTD, TRAD) is 2.83 . So lets average those two numbers, why not, and we get 2.09. Being conservative let's make a cushion and subtract it by 20% or 0.42 for potential risks (SEC inquiries, Gov market intervention, clearing house issues, recession, flight to cash) and we get around 1.67 as the P/S multiple. So based on the 9/30/2008 sales per share of 5.763, the value based on the sales multiple would be around $9.62. However, the consensus estimate of 5 analysts believe annual sales ending 12/31/2009 will be $20 Million lower than today, which is $361 Million or $5.42/share. So with lower sales and the same multiple, we get around $9.05. The valuation could be lower if investors demand a narrower multiple during a recession, or if sales come in lower than expected. It could also take months for market conditions to improve, or years if another disaster pops out of nowhere, you never know.
Investors reacted positively to earnings before and after the announcement. It also rallied off of an oversold condition. Based on the technicals there are a few barriers coming up so the stock will need strength to break out. Until this happens it is tough to tell if we're ready for an uptrend or about to re-test the lows. But recession aside, thinkorswim should prosper if retail investors still demand an options platform. The severity of the recession or slow down will be the wild card for future growth.
So, again, I'm not recommending to buy or sell anything, but if I were to go long here I'd probably buy puts to protect myself from downside risk , because I wouldn't be surprised to see SWIM retest $5-$7 if the market implodes again. So keep an eye out for a breakout and go to stocktwits.com to see if people are tweeting about the company. Here is a chart of the stock w/ technicals as well as a comparison between the performance of OptionsXpress and thinkorswim.
