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Author: jnahmias Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 377  
Subject: My take on Wit's 2Q 2000 Date: 7/20/2000 5:12 PM
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Okay,

Here's my deal. I watched this stock for a while (3 months or so) before I bought around mid March at $18/share. There are a number of reasons I bought:

o I thought the IPO market was red-hot and would remain that way for a while.
o I though that Wit was best equipped to make a killing off of the IPO market.
o I liked the fact that Wit catered to the individual investor.
o I had faith in the management to be able to expand and grow Wit to become a world class firm.

Of course, as soon as I bought at $18, it tumbled to ~$14 -- but I knew that was entirely due to my buying :) A week or two later, Wit announced that it had a fantastic quarter and had actually turned a profit about a year ahead of Wise expectations. I certainly thought that it wouldn't take as long as The Wise said it would, but I didn't think it would happen this fast!! So, I sat back and grinned believing that the IPO market was terrific and that Wit's jump to $21 was only the beginning... Since then a number of things have happened:

o The IPO market has come to a crashing halt.
o Ron Readmond announced his resignation as Co-CEO.
o Wit Capital officially changed it's name to Wit SoundView.
o Wit and E*Trade decided to swap brokerage for underwriting.

So, now what do I do? Analyse each one individually -- of course!

The crash and burn of the IPO market doesn't bother me all that much -- it had to end eventually, and Wit knew this -- so they have branched out into other types fo stuff such as M&A, Venture Capital and expanding global operations.

The changing of the name to Wit SoundView was inconsequential from my point of view. When Wit bought SoundView, I viewed it more as a merger of equals rather than an outright acquisition -- this just was just the formalization of that relationship.

Then we have the E*Trade deal. In my opinion this is pure brilliance and a win-win for both parties. It's really a case of everyone gets what they truly want: E*Trade gets the retail brokerage part of Wit since that's their focus; Wit gets E*Offering, the underwriting part of E*Trade as well as access to all of E*Trade's retail customers. I think this is truly great because it lets Wit focus on what it wants to do -- underwriting, without having to run a brokerage to have people to sell to.

However, the resignation of any corporate officer should make a shareholder pause, and this one certainly did. After all, the company has been public for approximately ONE YEAR and a CEO resigns?!! This one completely caught me by suprise. I felt angry and betrayed. In the days that followed I calmed down a bit and thought that maybe this was for the best: there can (and should) be only one Chief in the camp (see what happened to Lehman Brothers when they had two co-CEOs -- they eventually had to be bought out by AXP!!)

Finally, we get to Wit's 2Q earnings. Bear with me on this because I'm going to slice and dice their Income statement. The way I see it Wit made approximately 9 cents per share this past quarter. Let me explain: I wanted to figure out how much money actually cam into Wit this past quarter -- ignoring all the other stuff such as interest, investments, amortization, and all the other non-cash stuff. Here's what I did:

I added the IB, Brokerage, Asset Mgmt., and Other revenue items to get a total revenue of $92,719,754. Next I added the Compensation, Clearing, Marketing, Professional Svcs., Data Processing, Tech. Development, Occupancy, and Other expense items to get total expenses of $77,060,815. I then subtracted out the $6,683,389 in Taxes to get a Net Income of $8,975,550. I then divided by the average diluted shares of 98,800,933 to get an EPS of $0.0908 or 9 cents per share.

Now, I still think that this is low, because there was a one-time charge (non-cash) this quarter having to do with the resignation of Mr. Readmond which I may not have subtracted out (I think it's buried in the Other Expenses line item, but I'm not sure if so and how much). If that's the case we might be looking at an EPS of 10 or 11 cents per share.

Considering that this is the quarter that the dot-coms crashed and the IPO market fell flat on its face, I think that Wit did a SUPERB job!

Looking towards the future, I see Wit focusing more and more on it's core business -- underwriting, and the transaction with E*Trade should prove to be extremely beneficial.

As to why the stock price is hovering around $10, here's the way I look at it: Assuming that earnings remain flat at 10/share/quarter, this gives Wit a P/E of 25. Considering that Schwab (SCH) is now trading at a P/E of 66, TD Waterhouse has a P/E of 32, Onlinetrading.com has a P/E of 42, and DLJ Direct (DIR) has a P/E of 55; and the fact that I expect Wit's earnings to be anything but flat, I think we are in for some major capital gains!!


Fool On,

Joe

Disclaimer: Long WITC!!!
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