Unscrambling Monday's Egg

Unscrambling TD Waterhouse

Running TD Waterhouse through the Chicks' Dozen.
by Chick Cheryl

Since you're online checking out our Chicky financial website, you just may have heard of this company. If not, read on, this is a company individual investors might want to become familiar with.

1. Buy What You Know   I picked this TD Waterhouse because I actually know it pretty well. It's the stock (NYSE: TWE) I wanted to learn more about. TD Waterhouse is the first investment broker I ever had.well, technically. I guess there was some Merrill Lynch account I once had when I was acting on the Soap, but I was totally clueless as to what went on with it, so we'll call Waterhouse my first. I love working with Waterhouse and have never thought of switching, despite lower rates elsewhere. (Although Waterhouse commissions are pretty darn low at $12 per trade.) Sure, I opened an additional account at MyDiscountBroker.com after shooting a television commercial for them, but they aren't traded publicly so we won't include them here.

2. Keep It Simple Sister  That's why I love this company so much -- they do keep it simple... and convenient! TD Waterhouse Group, Inc. is a global online financial services company, providing online investing services and related financial products for the "self-directed" investor. That's what we are Chickies, self-directed investors! Yes, we have and need brokers, but they don't get in our way telling us what to do. The company has over 230 branches worldwide and can boast that they are the only online financial services firm to have branches in all 50 states of the U.S. Of course, you may never even need to see a branch, since customers in major markets are able to use their services 24 hours-a-day, 7 days-a-week through various channels including, webBroker, toll-free telephone numbers, wireless channels on Web-enabled phones and touch-tone trading.

The company's primary markets are the US and Canada, which accounted for 66% and 29%, respectively, of their fiscal 2000 revenue.

3. Industry   Their industry is "Investment Services". Their competitors are companies you've probably seen advertised, especially on the net. They include E-Trade, Ameritrade, and  Schwab, all traded publicly, and a host of other discount brokers, some privately held and some not.

4. Leader In Its Field   There is a company called Forrester that researches and analyzes technology change and its impact on business, consumers, and society. Just this week, in their Winter 2000 Forrester Research Brokerage PowerRankings T, they listed TD Waterhouse as the top online broker website. Apparently, they used survey data from online consumers coupled with unbiased testing to provide objectivity. The reasons given for the success of Waterhouse really mirror my own. They were -- fast e-mail responses, $12 online market orders, retirement planners and unlimited real-time quotes. Other extras were an added bonus, such as an asset allocator, checking accounts (which I love) and wireless trading.

5. Repeat Profitability   Every time you make a trade, you pay a commission, right? Ka-ching! Oh, how Waterhouse must love day-traders! Even investment clubs provide a steady source of income through trading. Whether we're buying, selling or adding to a position in one of our holdings, we're trading every 3months, paying a commission. Also, consider they have averaged 150,000 trades a day (obviously, fewer recently), even at $12 per trade, the revenue is considerable. Touch-tone trading by telephone is $35... wow, even mo' money!

NOTE: Numbers were taken from the quarterly balance sheets and income statements (1/31/01) found at www.marketguide.com. Numbers are in millions.

6. Gross Margins

(Sales - Cost of Goods Sold) / Sales

(347.3 - 39.5) / 347.3 =

307.8 / 347.3 = .886

.89 x 100 = 90%

Yowza, that's well over the Chicks 50% criterion!

7. Net Margins

Net Income / Sales

37.1 / 347.3 = .106

.11 x 100 = 11%

Again, they're higher than the Chicks 8% criterion.

8. Cash vs. Long Term Debt

Cash* / Long Term Debt

412 / 0 = 0

*cash, including marketable securities

Wow, TD Waterhouse has zero long-term debt, leaving it cash rich... Chicks like that!

9. Flow Ratio

(Current Assets - Cash*) / (Current Liabilities - Short Term Debt)

(9592.9 - 412) / (7326.7 - 27.5) =

9180.9 / 7299.2 =  1.26

Right in line with where we Chicks want it to be!

10. Increasing Growth

(most recent quarter's sales - last year same quarter's sales) / last year same quarter's sales = X

Sales Q1/31/01 = 347.3   Sales Q1/31/00

(347.3 - 381.6)  /  381.6 =

-34.3 / 381.6 = - .08

-.08 x 100 = -8% decreasing growth  

Considering their "product", we should probably have expected a sales decrease. In the past 4 quarters of the last year, revenues have been up, then down, up, then down again. TD Waterhouse has certainly been on a roller coaster ride, as has the market, in general. Brokers have definitely suffered their share of motion sickness. Granted, for the market to be spiraling downward, people must be selling, which means trade commissions, but people just don't trade the same way when they're running from a bear as they do when they're riding a bull! In addition to shrinking trades per existing account, they are having difficulty signing up new customers as well. The short-term outlook is pretty grim. According to First Call/Thomson Financial, the overall brokerage sector is expected to show a loss of 25% for the first quarter of 2001 compared with the year ago period. Analysts expect that forecast could slide even lower. At this point, the following quarters appear better, but only slightly. One analyst says we'll be seeing a lot of acquisitions and consolidations in the world of e-finance. Like the rest of the tech industry, I suppose, only the strong will survive.

11. Strong Management and History   It appears TD Waterhouse has only been trading publicly since 1999. Since 1979, management claims they have provided the best mix of products, price and service that customers need to manage their own investments and personal finances in over 3.1 million active accounts. President and COO, Frank J. Petrilli says the company has dedicated themselves to continually improve their ability to provide investors with easy access to their personal finances, becoming the one website where investors can satisfy all of their financial needs. Having been a customer since 1996, I can attest to the changes they've made both on their website and with customer service that have markedly improved the ease with which I use my account.

12. Buy on Sale

52 week high: 27

52 week low: 9.50

52 week average: 18.25

Current stock price: 10.80

Yep, this one's been hit all right. I suppose the real question is whether you believe in their future. It takes a real unemotional investor to swim against the salmon and buy a company when it's getting pounded because of a bleak outlook. But look at those numbers! I think I'd better get back to my nest, sit on my eggs and think awhile.