JB Oxford JBOH
September 09, 2001 - 11:58pm EST by
2001 2002
Price: 1.04 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 15 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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JB Oxford is an online brokerage with roughly 175,000 accounts. Because much
of the cost structure associated with an online brokerage can be eliminated
when acquired by another entity we are seeing M&A heat up as the eBrokers
deal with these difficult times. At friday's closing price JBOH is
currently valued at less than $100 per account.

Obviously the number of accounts is not the only way to value a broker.
There are certain characteristics of an account base that make it more or
less desirable (how often those accounts trade, size of assets etc.) But
there is a certain price that the larger eBrokers are willing to pay to
acquire an account. These prices used to pretty high, schwab paid 20x
revenue for Cybercorps in 1999, but now are more reasonable. (JBOH had over
100mm in revenue in 2000 but now trades at an 18mm market cap.)

I will leave out the absurd M&A transactions like Cybercorps and focus on
the recent history.

On August 16, 2001 TD Waterhouse agreed to purchase RJ Thompson Holdings'
13,400 accounts for 50-100mm (undisclosed). With a total 5,600 trades a day
these are high quality accounts, and there were some strategic reasons for
the acquisition - (filled a technology and product gap)but using the low end
(50mm) the $3731 price tag is pretty generous.

On August 16, 2001 Schwab CFO Christopher Dobbs told the Wall Street Journal
that the brokerage was interested in an "acquisition or joint venture" with
another firm to help it replace revenue lost from decimalized trading.

On July 31, 2001, Ameritrade announced it would acquire National Discount
Brokers for $154mm or $487 an account. (well below the 7-9,000 per-account
value at the markets peak) It is important to note that these are low
quality accounts - the average NDB customer traded only 1.8x a quarter.

E*Trade recently purchased the 34,000 accounts of WebStreet for $45mm or
over $1000 an account. (This price is a little misleading because e*Trade
was also buying the retail locations to expand their physical brand.)

On May 22, E*Trade recently completed a 325mm convert which they stated was
earmarked for acquisitions. CSFB has also been trying to purchase CSFB
Direct (formally DLJ Direct)

Most importantly, these companies are still spending money to grow in order
to lever their fix asset bases. They continue to spend between $300-800 to
acquire each new account. (800 last year, 300 this year) E*Trade spent $564
in Q1, $535 in Q2 and $383 in Q3 to acquire new accounts. At anywhere near
its current $100 an account trading price, it is drastically cheaper for
e*Trade to acquire accounts throught the purchase of JBOH.

Other Valuation Metrics:
(i am cheating here a little and stealing from an 8/6/2001 Warburg Report)
Price/Sales is more meaningful for the eBrokerage business than most other
businesses because when examining an acquisition the cost structure is less
of an issue because you will be using your own cost structure going forward.

Price/2001e Revenue:
Ameritrade: 2.9x
ETrade: 2.0x
Schwab: 4.8x
TDWater: 3.4x

In 2000, JBOH had total revenues of $100,861,961
This past quarter JBOH had revenue of 9.4mm (37mm annualized)


JBOH management correctly believes the company is undervalued and is not
willing to sell at current prices. It has instead chosen to acquire the
assets of even smaller brokerages such as Bull and Bear securities. Either
the company will have to be acquired at a notable premium, 100%+ which could
still easily be justified by a larger brokerage - Or the company will have
to run into further trouble before the management is forced to be sell.

It is always tough to get comfortable with event driven ideas and usually I
stay away from pure relative value trades. But in the current environment
the asset in question has almost become a commodity. There is a price where
it makes sense for any one of 20 entities to purchase the company. The bet
is that it will happen sooner rather than later at a return acceptable to
the investor.


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