Schwab's Market Value Beats Merrill's

L.A. Times Archives

Dec. 29, 1998 12 AM PT

<i> From Bloomberg News and Times Staff</i>

The mania for Internet commerce stocks is hitting Wall Street where it lives.

Boosted by a surging stock price in recent months, discount brokerage Charles Schwab Corp.--the largest Internet brokerage--now is worth more in market value than Merrill Lynch & Co., one of the best-known full-service brokerage names worldwide.

Schwab’s market value--the stock price times number of shares outstanding--has rocketed to $25.5 billion, eclipsing Merrill’s market value of $25.1 billion, according to Bloomberg News calculations.

“In some respects, it is a passing of the baton from the full-service to the discount industry,” said Bill Burnham, an electronic commerce analyst with Credit Suisse First Boston. “It also indicates that investors feel a bit more comfortable with a company [Schwab] that has a very focused business model and focuses on retail investors.”

Other analysts say buyers who have pushed Schwab shares to record highs recently are simply treating it as they would any other stock with a Net-related business plan, or even just the hope of one: That is, they’re piling into the shares without studying the fundamentals too closely.

On Monday, Schwab shares jumped $3.25 to close at a record $63.63, while Merrill shares fell $1.06 to close at $70.75. Both trade on the New York Stock Exchange.

“That’s truly astounding--inferring that they’re as valuable as Merrill is faulty logic,” contends Barry Hyman, senior market analyst with Ehrenkrantz King Nussbaum Inc.

Still, Schwab is hardly a start-up company: The 27-year-old San Francisco-based firm holds $461 billion in client assets and is both the largest discount brokerage and the largest in terms of customers trading over the Net.

Unlike the 84-year-old Merrill, Schwab doesn’t underwrite stocks or bonds, advise companies or governments on their finances, or offer the breadth of individual-investor services that the full-service brokerages offer.

But the online discount brokerages as a group are where the trading action--and thus commissions--has been lately, as individuals chasing Net-related stocks have, not surprisingly, chosen to do so via the Net itself.

Industry analysts estimate that Internet-based trading has jumped more than 30% this quarter.

Also on Monday, E-Trade Group, a Palo Alto-based online brokerage challenging Schwab for supremacy, saw its shares zoom $11.75 to a record $56.75 on Nasdaq after it said its new Web site has signed up more than 500,000 members since September.

Membership to the “Destination E-Trade” site is free, and those who register get free real-time stock quotes, breaking news, charts and research, live market commentary, and analyst earnings estimates.

E-Trade executives hope people who sign up for the site will later open brokerage accounts to trade stocks.

The 500,000 new members is a “nice number, but the key here is not registered users. It’s actual accounts,” Burnham said.

Registered members are “a private hunting ground for new accounts. It’s a positive [development], but probably not a $12 positive,” Burnham said, referring to the stock’s gain.

After trading closed Monday, another online brokerage, National Discount Brokers, said earnings in the quarter ended Nov. 30 rocketed to $5.88 million or 42 cents a share, from $2.09 million or 16 cents a year earlier. Revenue leaped 28% to $54.5 million. The company’s shares fell $2.38 to $14 on the NYSE in regular trading.

For longtime Schwab shareholders, frenzied buying of the stock by Net-focused investors has produced a huge paper wealth gain in recent months. The stock has soared 244% from its 52-week low of $18.50.

The stock now is priced at 82 times the company’s most recent 12 months earnings per share. By contrast, Merrill’s price-to-earnings ratio is a mere 21.

Michael Flanagan, an analyst at Financial Services Analytics in Philadelphia, said Merrill has been cautious by delaying entry into online brokerage services.

But he also argues that Merrill will be “a very formidable force” when it launches Internet stock trading next month.

Rumors that Merrill might someday buy Schwab, meanwhile, don’t seem to have much credibility, analysts say.

* PRIMER: The Motley Fool explains how online trading works. C9

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Brokers’ Value

Here are current market values (stock price times number of shares outstanding) for a cross-section of Wall Street firms:

Brokerage / Market value

Morgan Stanley: $44.5 billion

Charles Schwab: 25.5 billion

Merrill Lynch: 25.1 billion

PaineWebber: 5.5 billion

Lehman Bros.: 5.1 billion