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Brokers spring back in 3Q
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October 12, 1999: 3:04 p.m. ET
Merrill, Paine Webber, DLJ ride stronger market to top Wall St. targets
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NEW YORK (CNNfn) - Three of the nation's top brokerage houses Tuesday reported sharply higher income in the third quarter, rallying back from global market doldrums that struck in the year-ago quarter.
Merrill Lynch & Co., Paine Webber Group and Donaldson Lufkin & Jenrette Inc. all handily beat analysts' expectations for the latest quarter, led by the resurgent stock market after last year's Asian and Latin American woes.
Aside from that blip down, the U.S. bull market, now nine years running, has been a boon to Wall Street brokers such as these. All three posted hefty upswings in "principal transactions" -- an industry buzz phrase for trades executed.
The better-than-expected results, analysts said, suggest that older, bricks-and-mortar brokerages may have survived, at least for now, the ballyhooed threat of upstart online brokerages. Some observers suggested the cut-rate fees Internet brokers charge would cause wide defections to online trading and nab at least some profits from Wall Street firms.
Now, in fact, some firms like Donaldson's DLJ Direct affiliate, for example, have seen sequential, quarter-to-quarter trading volume fall off. That's just as Merrill added 100,000 fee-based accounts for its wealthier clients from June through September and prepares to offer $29.95 per trade in December, in another major step into the online trading terrain.
"We're about to enter a food fight," said Steve Galbraith, an analyst at Sanford C. Bernstein. "We have Merrill coming down to meet the online firms -- coming out with $29.95 per trade -- and a low group coming up to offer services like advice. It's probably going to settle somewhere in between."
Despite signs of withstanding the online onslaught, the outlook ahead for Wall Street firms is uncertain. Higher interest rates, which can hurt trading volume and thus profits, and fears about the Y2K computer bug have led to talk of market uncertainty ahead.
"Anytime you enter a new millennium, you are bound to have more uncertainty," Paine Webber Chairman and CEO Donald Marron said during an interview with CNNfn.
Partly for those reasons, investors appeared to reserve judgment about whether the improvements were a one-time blip or signs of continued rebound. In early Tuesday trade, shares of Merrill added 9/16 to 68-5/16, Paine Webber fell 3/16 to 35-1/2, and DLJ shot up 2-7/16 to 42-3/4.
Merrill: the bull charges ahead
Securities industry leader Merrill Lynch, not only coming off the market dive in the third quarter 1998 but a big charge for job cuts then as well, beat Wall Street estimates by a nickel per share.
New York-based Merrill (MER) earned $572 million, or $1.34 a diluted share, in the third quarter, compared with a loss of $163 million, or 48 cents a share, a year ago.
Analysts had expected Merrill to earn $1.29 a share for the latest quarter, according to First Call, which tracks earnings estimates. The year-ago figure excludes an after-tax charge of $288 million to pay for staff cuts. Aside from that, the firm had operating income of $125 million, or 28 cents per share.
Total revenue rose 37 percent to $5.8 billion, with revenue from stock and bond trades rocketing 243 percent to $1.1 billion.
Merrill, said one analyst, learned a lesson from the turbulence a year ago and has begun to diversify its product slate to better cope with such uncertainty.
"When you look at [Merrill] vs. a year ago, during all the stresses in the financial system in August and September, they refocused their risk management capabilities," said Dean Eberling, a brokerage analyst at Putnam Lovell de Guardiola.
Strong merger and acquisition activity, from which Merrill earns fees by acting as an adviser, powered a 33 percent climb in investment banking revenue to $948 million.
Merrill said its new fee-based investor service, which includes online trading options, had added 100,000 accounts since it was announced in June and has exceeded expectations.
Paine Webber noses past targets
Paine Webber Group, the nation's fifth-largest securities firm, posted a 67 percent jump in third-quarter income as the brokerage strives to develop a niche with wealthier clients.
Paine Webber (PWJ) reported income of $138.2 million, or 86 cents per diluted share, up from $82.9 million, or 51 cents per diluted share, a year earlier. The consensus of analysts polled by First Call was for earnings of 83 cents a diluted share.
Revenue rose 20 percent to $1.24 billion.
Paine Webber is in the midst of an effort to recast itself as a specialist for wealthier clients who prefer fee-based services that allow them to carry out their trades without limit and without per-trade charges.
"We're moving the business much more toward a fee-based business," Marron told CNNfn. "It's less vulnerable to volatility in the market."
DLJ banks on junk bonds
Donaldson Lufkin & Jenrette Inc. blew past Wall Street forecasts for its third quarter by9 cents per share as a result of solid underwriting of stocks and high-yield bonds, after a lull in the year-ago quarter.
DLJ (DLJ) said net increased fourfold to $122.2 million, or 85 cents per diluted share, up from $25.7 million, or 15 cents per share, a year ago. The First Call estimate was for DLJ to post 76 cents a share.
Revenue rose 59 percent to $1.7 billion.
DLJ's banking group pitched in $449 million in fee income from strong merger and acquisition advisory growth. Meanwhile, the firm underwrote $4.3 billion in high-yield, or "junk," bonds and raised its market share to 25 percent in the third quarter.
Meanwhile, DLJ Direct (DIR), DLJ's online brokerage subsidiary, reported a net loss of $3.3 million, or 3 cents per diluted share, in line with the analysts' forecasts. That followed a pro forma net loss of $800,000, or 1 cent a share, a year earlier.
Revenue rose 82 percent to $54.9 million.
The online brokerage, like many of its rivals, has been willing to take losses in the short-term as it spends large sums to pay for marketing. However, DLJ Direct said total trades executed fell 12 percent from second-quarter levels, due to seasonal factors and a market drift after a heady second quarter.
Shares of DLJ Direct rose 3/8 to 15-1/2. 
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