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Bet the 'House' Not the Gambler: TradeStation Group, Inc.

January 31, 2008 | About:
TradeStation Group, Inc. [NDQ:TRAD] Jan. 31 opening price: $10.87

52-week range: $9.41 - $14.87

TradeStation is a provider of a proprietary trading platform [the TRADESTATION] for sophisticated investors in equities, FOREX, options etc. They serve both the professional and the retail ends of their market. Their platform and services have been top-rated by Barrons and others in terms of both features and pricing versus their competition.

TradeStation turned profitable in 2002 and has posted large year-over-year increases in EPS ever since. Sequential EPS results were:

2002: $0.02

2003: $0.27

2004: $0.33

2005: $0.48

2006: $0.67

2007: $0.79 [with a 4Q $0.21 estimate]

Consensus results for 2008 are expected to come in at $0.88 for their seventh straight year of record earnings. Revenue and book value growth have paralleled the earnings increases.

TRAD has zero debt [neither short-term nor long-term] and cash has been building nicely.

As of June 30, 2007 they held $89.1MM or about $2/share in treasury cash.

Today's volatile markets have been beneficial to TradeStation. Client trading was up 55% in November and 44% in December on a year-over-year basis. January trading volumes should also show big gains versus year ago levels.

Many savvy investors hold large stakes in TradeStation:

[as of September 30, 2007]

FMR [Fidelity Funds] held 7.28%

Royce & Associates held 5.44%

Barclay's Global Inv. held 4.05%

MFC Global Inv. held 3.31%

Putnam Inv. Mgt. held 3.16%

Skyline Asset Mgt. held 2.66%

Dimensional Fund Adv. held 2.38%

Renaissance Group LLC held 2.00%

Kennedy Cap. Mgt. held 1.98%

Skystone Advisors held 1.91%

TradeStation is a confirmed 'growth stock' at a non-growth valuation. TRAD shares are only 13.8X last year's and 12.4X projected 2008 earnings. In the four years 2003 - 2006 their shares sported an average P/E of 21.7X. The only sub-20 P/E in those years came in 2005 when TRAD had an average P/E of 18X.

Even an 18 multiple on this year's EPS estmate leads to a target price of $15.84 or up 44% by year-end. A more optimistic 20 multiple could see these shares at $17.60 or plus 60%. Crazy? Nope... TRAD actually hit $17.81 in Jan-Feb of 2006 on trailing EPS of $0.48 [from 2005]. They touched $13.75 way back in 2003 in a year when they had full-year earnings of $0.27/share.

Risk? With no debt, cash in the till and fast growing earnings I don't see much downside here. The absolute low prices in the 2006 - 2007 panic markets were $11.11 and $9.41.

NOTE: Unlike many companies, TradeStation has not given in to employee stock option craziness. Shares outstanding were 44.55 MM in 2001 and were 44.27 MM as of June 30, 2007.

Disclosure: I own shares of TRAD currently.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 4.0/5 (17 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Latest Value Line data on TRADESTATION:

TRADESTATION NDQ--TRAD 10.69 13.9 0.83 Nil

1 Highest

2 Above

Average

4 Below

Average

1.60

Financial Strength B+

Price Stability 10

Price Growth Persistence 55

Earnings Predictability 35

ANNUAL RATES

of change (per share) 5 Yrs. 1 Yr.

Sales 12.0% 31.0%

‘‘Cash Flow’’ -- 45.0%

Earnings -- 39.5%

Dividends -- --

Book Value 20.0% 41.5%

Fiscal

Year

QUARTERLY SALES ($mill.) Full

1Q 2Q 3Q 4Q Year

12/31/05 21.9 23.3 24.5 27.3 97.0

12/31/06 29.4 32.5 32.2 34.4 128.5

12/31/07 35.3 35.9 40.3

12/31/08

Fiscal

Year

EARNINGS PER SHARE Full

1Q 2Q 3Q 4Q Year

12/31/04 .08 .13 .04 .08 .33

12/31/05 .09 .11 .12 .16 .48

12/31/06 .14 .17 .17 .19 .67

12/31/07 .18 .18 .22 .22

12/31/08 .20 .21

Calendar

QUARTERLY DIVIDENDS PAID Full

1Q 2Q 3Q 4Q Year

2005 -- -- -- -- --

2006 -- -- -- -- --

2007 -- -- -- -- --

2008

INSTITUTIONAL DECISIONS

1Q’07 2Q’07 3Q’07

to Buy 67 69 60

to Sell 60 67 65

Hld’s(000) 23198 26480 29160

ASSETS ($mill.) 2005 2006 9/30/07

Cash Assets 75.1 83.9 92.0

Receivables 94.2 111.9 118.9

Inventory .0 .0 .0

Other .0 .0 22.4

Current Assets 169.3 195.8 233.3

Property, Plant

& Equip, at cost 11.9 19.7 - -

Accum Depreciation 8.7 11.0 - -

Net Property 3.2 8.7 7.5

Other 442.6 444.6 459.1

Total Assets 615.1 649.1 699.9

LIABILITIES ($mill.)

Accts Payable 527.1 523.6 555.0

Debt Due .0 .0 .0

Other 5.5 7.3 7.6

Current Liab 532.6 530.9 562.6

LONG-TERM DEBT AND EQUITY

as of 9/30/07

Total Debt None Due in 5 Yrs. None

LT Debt None

Including Cap. Leases None

Leases, Uncapitalized Annual rentals NA

Pension Liability None in ’06 vs. None in ’05

Pfd Stock None Pfd Div’d Paid None

Common Stock 43,992,170 shares

(100% of Cap’l)

16.00 8.75 5.79 1.90 13.75 11.40 14.18 17.81 14.87 14.35 High

2.50 1.63 1.20 0.91 1.28 4.78 5.66 11.11 9.41 10.67 Low

© VALUE LINE PUBLISHING, INC. 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008/2009

SALES PER SH 1.75 1.19 .92 1.22 1.45 1.72 2.20 2.88 --

‘‘CASH FLOW’’ PER SH .04 d.08 d.24 .10 .33 .40 .52 .75 --

EARNINGS PER SH d.01 d.25 d.41 .02 .27 .33 .48 .67 .80 A,B .87 C/NA

DIV’DS DECL’D PER SH -- -- -- -- -- -- -- -- --

CAP’L SPENDING PER SH .07 .02 .01 .04 .03 .03 .04 .18 --

BOOK VALUE PER SH 1.04 .88 .39 .31 .72 1.18 1.87 2.65 --

COMMON SHS OUTST’G (MILL) 24.48 44.48 44.55 39.59 41.45 41.86 44.18 44.68 --

AVG ANN’L P/E RATIO -- -- -- 63.4 26.7 21.4 18.1 21.8 13.4 12.3/NA

RELATIVE P/E RATIO -- -- -- 3.46 1.52 1.13 .96 1.18 --

AVG ANN’L DIV’D YIELD -- -- -- -- -- -- -- -- --

SALES ($MILL) 42.9 52.9 41.0 48.4 60.1 71.8 97.0 128.5 -- Bold figures

OPERATING MARGIN 10.3% NMF NMF 6.1% 21.6% 22.8% 39.9% 43.8% -- are consensus

DEPRECIATION ($MILL) 1.1 7.5 7.8 2.9 2.3 2.0 1.8 2.5 -- earnings

NET PROFIT ($MILL) d.2 d11.0 d18.5 1.0 11.6 14.7 21.1 31.0 -- estimates

INCOME TAX RATE NMF -- -- -- -- .8% 35.2% 37.9% -- and, using the

NET PROFIT MARGIN NMF NMF NMF 2.0% 19.3% 20.5% 21.7% 24.1% -- recent prices,

WORKING CAP’L ($MILL) 22.4 18.6 13.4 8.6 25.4 d321.9 d363.3 d335.1 -- P/E ratios.

LONG-TERM DEBT ($MILL) -- .2 1.4 1.4 .0 -- -- -- --

SHR. EQUITY ($MILL) 25.5 39.0 17.5 12.4 29.7 49.3 82.5 118.2 --

RETURN ON TOTAL CAP’L NMF NMF NMF 6.9% 39.1% 29.8% 25.5% 26.2% --

RETURN ON SHR. EQUITY NMF NMF NMF 7.7% 39.1% 29.8% 25.5% 26.2% --

RETAINED TO COM EQ NMF NMF NMF 7.7% 39.1% 29.8% 25.5% 26.2% --

ALL DIV’DS TO NET PROF -- -- -- -- -- -- -- -- --

ANo. of analysts changing earn. est. in last 2 days: 0 up, 0 down, consensus 5-year earnings growth not available. BBased upon 3 analysts’ estimates. CBased upon 3 analysts’ estimates.

INDUSTRY: Computer Software/Svcs

TOTAL SHAREHOLDER RETURN

Dividends plus appreciation as of 1/31/2008

3 Mos. 6 Mos. 1 Yr. 3 Yrs. 5 Yrs.

-10.66% 3.12% -14.58% 78.69% 397.72%
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Tradestation reported December quarter earnings last night.

Fourth quarter EPS were $0.21 v. $0.19 or + 10.5%

Full Year 2008 EPS were $0.78 v. $0.67 or + 16.4%

2008 reveneus were $151.6 MM v. 2007 sales of $128.5 MM

for a year-over-year gain of + 17.97%.

At yesterday's close of $10.15 this debt-free, cash-rich, growth company's shares trade at just 13x last year's earnings.

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