Description
TD Waterhouse is one of the top 5 on-line brokers/financial services companies. It is 88% owned by Toronto Dominion of Canada.
Thesis: TWE common offers an extremely attractive risk/reward. The stock trades at a small 25% premium to a solid book value. The equity/assets ratio of the firm is an astounding 30%--mostly because the company raised a ton of capital in the deal and it is just sitting on the balance sheet in liquid assets. TWE cannot buy back stock because of the limited float. It is extremely attractive to the parent company to take the whole thing in, and use the excess capital to buy bank TD stock @ 11x earnings. Unlike the situation where CSFB bought in DIR (where you still made close to 100% off the bottom), TD is a responsible company that is probably extremely embarassed to have the stub trading in the single digits (i.e. i don't believe they will screw the minorities). Moreover, the extremely liquid b/s @ TWE makes it far more financially attractive for TD to buy in the stub than it was for CSFB vis a vis DIR.
Moreover, in lieu of a buy-in I think TWE is near a bottom on its own. Fundamentals in the e-brokerage space are probably close to the bottom, the business is not going away, and many of the weaker competitors have been driven out of business. TWE has historically been very profitable with p/t margins in the 30% range. It will probably take 12-18 months to rightsize the expense base in line with current revenue run-rates, but you could have ~.50/share in EPS on a $6 book value at an e-broker that is overcapitalized by 200%. Even at current revenue run-rates down 50% yoy, TWE is at cash earnings break-even.
Additional Details: TD Waterhouse was spun out of TD Bank (a pretty staid Canadian bank) post the peak of the itnernet trading boom. The company remains 88% owned by the parent. Subsequent to the spinout, fundamentals in the e-brokerage space have imploded. To make a long story short, the companies in the space (ET, SCH, TWE) built huge infrastructures/expense based on rosy projections of ever-increasing trade volumes/asset flows off of a bubble in said metrics. The shakeout post-bubble has been particularly brutal because expenses kept growing as revenue collapsed.
That said, TWE is clearly a survivor with an extremely liquid balance sheet (30% equity/assets--normal # is more like 10%--that is the whole key to this situation), a much broader financial services platform than your AMTD or Datek (i.e. mutual funds, debit cards, etc), and a historically profitable business (30% p/t margins pre-boom).
Even in today's horrible retail environment for trading (according to some I talk to the retail brokerage biz today is worse than 1990-1991), TWE is operating at cash EPS breakeven. The company has announced a major restructring and is attempting to rightsize their expense base. I expect this to take 12-24 months.
Bottom line is that this is a broken partial spin out in a sector that is down 80%+ and totally out of favor. These guys will survive, they are not losing $$ today, and the balance sheet is extraordinarily liquid. All of this makes the likelihood of a buyout by the parent extremely likely, in my view. I believe likelihood of a buyout is 75%+ in the next 12 months, and upside/downside appears to be 7/2+, in my view.
I welcome all comments and questions.
Cheers,
JR
Catalyst
A buy in by TD is the obvious catalyst. I believe the economics are compelling enough for TD given the b/s of TWE that this could happen at perhaps 2x today's price. In any case, the downside here appears to be only a dollar + compared with hard book of $6 and ridiculous over-capitalization of the broker. If the fundamentals turn, that is gravy.