Chase H&Q cautious on online brokers

Watch out for Charles Schwab (NYSE: SCH) Monday after Chase H&Q downgraded the stock. It also toned down forecasts for online brokers E*Trade (Nasdaq: EGRP), Ameritrade (Nasdaq: AMTD), and Knight (Nasdaq: NITE), which will all be affected by lower retail trading volumes.

Schwab shares closed up 1.63 to 27.94 Friday. Market volatility has been affecting the online brokers for quite some time already.

Analyst Gregory W. Smith downgraded Charles Schwab from "buy" to "market perform," with a price target of $27.94 based on valuation concerns and a belief that the consensus estimates for the fourth quarter and the first quarter of 2001 are too high.

"We were holding out for a resurgence in retail trading volumes during November... this has not materialized and volumes are, in fact, likely to be down in November compared to October and December is a shortened month filled with holiday distractions..." Smith said in a report.

He lowered fourth quarter estimates from 14 to 13 cents a share, lower than the consensus estimate of 15 cents a share, which is expected to "come down in the weeks ahead, potentially placing further pressure on the stock."

Earnings estimates for 2001 were also lowered from 74 to 71 cents a share based on tempered trading volume expectations and slightly lower asset and margin debt levels.

Smith praised Schwab for building its fee-based revenue streams, but since 45-50 percent of revenues are still transaction-driven, the company's financial success is dependent upon prevailing market conditions.

While Knight/Trading (Nasdaq: NITE) was maintained at a "buy" rating, Smith lowered fourth quarter earnings from 33 cents a share to 25 cents a share, and revenue estimates from $273 million to $239 million. He left 2001 estimates unchanged.

"Despite a modest rise in volume and volatility during October, we believe that weak online trading volumes during the quarter will ultimately leave Knight with diminished revenue generating opportunities," Smith said.

However, Smith added,"Knight is uniquely positioned as the last independent market maker among the top 25 and that the shares are undervalued at current levels."

E*Trade Group (Nasdaq: EGRP) was maintained at "strong buy" since its revenue diversification should provide some support against the market weakness. Smith did trim fiscal 2001 earnings and revenue estimates and reduced the stock's 12-month price target, however.

For the first quarter of 2001, earnings have been trimmed from 2 cents a share to a breakeven amount, and revenues were lowered from $375 million to $350 million. Fiscal 2001 earnings were lowered from 31 to 26 cents a share and revenue is now expected to be $1.7 billion instead of $1.8 billion.

The company's 12-month price target was slashed from $44 to $30.

Ameritrade, Inc. (Nasdaq: AMTD) was maintained at a "buy," but also had targets cut due to its transaction volume dependency. First quarter earnings estimates declined from a penny a share to a loss of a penny a share, while revenue estimates declined from $155 million to $137 million.

"Despite Ameritrade's newly launched advertising campaign, we believe the difficult market environment is creating an uphill battle for new accounts," Smith stated.

Smith also lowered the company's 12-month price target from $27 to $20.