Analysts downgraded E*trade (Nasdaq: EGRP) and Ameritrade (Nasdaq: AMTD) Monday on concerns about trading volumes.
U.S. Bancorp Piper Jaffray analyst Stephen Franco cut his ratings on the two brokerages after Ameritrade and Datek online released November statistics. Franco lowered E*Trade to "buy" from a "strong buy" rating, and Ameritrade to "neutral" from a "buy" advisory.
At Chase H&Q, analyst Gregory W. Smith reiterated his "buy" rating on Ameritrade, but cut his estimates.
Shares in Ameritrade were up 0.5 to 9.875. E*Trade fell 0.38 to 9.59.
November statistics released by Ameritrade showed average daily volume of 101,000 trades, down from 12.2 percent from October.
"Ameritrade and Datek confirmed our fears about the combined impact of volatile market conditions and the uncertainty over the presidential elections on online trading volumes," Franco wrote.
Datek's numbers were down 10.5 percent, less than Ameritrade's, "as Datek's frequent traders are less deterred by adverse market conditions than the average retail investor," Franco noted.
Datek's results are an anomaly, Franco said, adding "it is safe to assume a bleaker forecast for the rest of the sector," which may become apparent next week when Fidelity and Schwab (NYSE: SCH) are expected to report their monthly numbers.
Franco reduced estimates for Ameritrade and e*Trade based on the results.
"We now estimate that the online brokers will show average daily trading growth of 6 percent to 8 percent in the December quarter, down from our previous estimate of 20 percent," Franco said.
For e*Trade, he sees net revenue at $343.3 million in the December quarter, down from $385.6 million. Earnings estimates were dropped to a break-even amount from a penny a share. He also lowered estimates for fiscal 2001 and 2002.
"We believe the picture is even more bleak for Ameritrade, which due to its "narrow and deep" philosophy, does not have as diverse revenue streams as e*Trade, Franco wrote.
He cut his first quarter 2001 net revenue estimate from $158.4 million to $130.5 million and earnings from a loss of a penny a share to a loss of 8 cents a share. Estimates were also lowered for foscal 2001.
The December quarter has historically been a strong one for online brokerages, but the long anticipated rally has yet to materialize, Franco said. While daily average trading in the Nasdq is up roughly 16 percent so far this quarter compared to the September quarter, institutional traders rather than individual investors have driven that activity, he noted.
Chase H&Q's Smith said he was lowering estimates to reflect higher than expected advertising and compensation expense, but maintained his "buy" due to the fact that "the bad news is already baked into ... shares."
Fiscal 2001 estimate was dropped to a loss of 9 cents a share from a loss of a penny a share. Earnings estimates for 2001 were dropped a loss of 32 cents a share from a loss of 19 cents a share.
Though Ameritrade released 200 temporary employees in an effort to cut costs, Smith said he believes the bulk of the savings will not materialize until the second quarter of 2001.