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Nancy: A Trader's Investment

07/23/2004 12:00 am EST


Nancy Zambell

Editor, Wall Street's Best Investments and Wall Street's Best Dividend Stocks

We began this special report with Nancy Zambell's investment advice to women. We end the report by again turning to Nancy, this time, for her latest specific investment advice. Here's the latest buy in her always-exceptional  UnDiscovered Stocks newsletter.

"The securities industry has survived many changes since the spring of 1792, when 24 Wall Street insiders inked a pact to create the NYSE. But perhaps now development was as significant as the SEC-decreed order on May 1, 1975, eliminating fixed commission fees. Brokerage companies heartily protested the new rule, refusing to negotiate commissions. When Muriel Siebert, the first woman to hold a seat on the New York Stock Exchange, led this move to offer lower commission rates than Wall Street had ever seen before. Soon, other firms followed suit, and a new subset of the stock brokerage business was born: discount brokerage houses.

"Today, 115 or so firms remain in the discount securities business.
Sitting at the very top of the discount business, Ameritrade (AMTD NASDAQ) is no newcomer. This year marks its 29th anniversary, and the company now commands a 23% market share. At the end of its March quarter, Ameritrade's customers were generating some 212,000 trades per day, on the heels of a 40% increase in volume in the fourth quarter of last year (while Nasdaq volume inched up just 6%). At a daily breakeven level of 29,000 trades, you can see that Ameritrade knows how to keep its costs down.

"In addition to being a standout in the discount brokerage industry, the services Ameritrade provides are beginning to compete head-on with its full-service brethren — and, naturally, at much lower rates. That's why Ameritrade has gone from 98,000 accounts in 1997 to more than 3.5 million at the end of fiscal 2003. In addition to online trading, Ameritrade also offers the choice of touchtone telephone trading. But those who transact online receive additional rewards. Ameritrade also offers tiered levels of products and services targeted to every level of investor — from the novice to the most experienced. And the company is making serious headway in targeting the very lucrative U.S. private client market, consisting of 137 million households with $11 trillion in assets, as well as business from institutional clients.

"In the discount brokerage business, the largest slice of market share is owned by the top five firms. And the competition is aggressively trying to knock Ameritrade from its top spot, but the company isn't planning to give an inch. Ameritrade participated in six of the 14 largest mergers or acquisitions that occurred in the online brokerage business, including the biggest since 2001 — Datek — adding 875,000 accounts to the company's coffers in 2002. The prior year, Ameritrade purchased National Discount Broker. More recently, the company acquired the accounts of in 2003. And so far this year, Ameritrade acquired 11,500 Bidwell & Company and 100,000 Brokerage America accounts.

"The company has a track record of acquiring revenues with very little of the fixed costs that typically accompany them. As a result, Ameritrade now has twice as many accounts with half the number of employees it had in 2000. As consolidation continues in the discount broker sector, Ameritrade is honing its shopping list. The company found that buying clients at some $285 per head is considerably less expensive than advertising for them at $300 each. Further, Ameritrade's low cost and superior technology results in incredible client retention rates, post-merger. Averaging only a 5.5% customer attrition rate (the lowest in the online broker industry), the company retained 93% of NDB's 200,000, 94% of Datek's 850,000, and 99% of Mydiscountbroker's 16,000 clients.

"I'm not going to kid you; competition for Ameritrade's business is heating up. But Ameritrade is not going to give up its leadership spot without a fight, and it has the strength to wage a fierce competitive scrimmage. Meanwhile, 2004 is headed for even greater results. Already, for the first half, Ameritrade is ahead of results for all of last year and is absolutely smashing its previous records, with record net revenues of $473 million and record net income of $153 million, with earnings per share of 35 cents.

"Ameritrade's fundamentals are beating the socks off its peers. It's nice to see the top-line (revenue) results culminate in great profits too (not always a given). Adding the company's profits to its great cash position ($201 million at the end of March) enhances Ameritrade's competitive position, setting the stage for future growth. Although Ameritrade's P/E is higher than its discounter peers, the company's value comes with a lot more products, services, financial strength, and cash flow than its typical competitor. And it's always looking to build shareholder value. In April, Ameritrade extended its stock repurchase program through May 6, 2005. Since the program was created in September 2002 (for 40 million shares), the company invested $292 million to repurchase 31.7 million shares. The extension is for another 30 million share repurchase, a 30 million share increase.

"The company recently attracted a bit of industry attention, too. Forbes named it "Best of the Web" in January; Stocks and Commodities gave it the Reader's Choice Award for the best online brokerage company in February; and last month, JD Power and Associates recognized Ameritrade for excellence in client service and process management, based on its Call Center Certification Program. The attention has not gone unnoticed. Recently, institutions bought 23 million shares of the company's stock, a 9.8% increase in institutional outstandings. Trading at a forward P/E of just 14.5, I am looking for a target price of $20, a very nice 69% appreciation from the current share price. I recommend that you buy 200 shares of Ameritrade, up to a price of $13.25. If the price should go higher before you place your order, wait until it goes back to $13.25 to purchase the shares. Also, keep in mind a mental stop-loss of 20% less than you pay for the shares."

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