Tuesday, September 19, 2006

Calls of Note Part 8

- Raymond James notes that this morning Investools (IEDU) announced the acquisition of
Chicago-based options broker Thinkorswim for $351 million in cash and stock. Investools, an online options and trading seminar education provider, believes that once its clients are educated, they will seek a broker to begin trading. Previously, Investools directed clients to open accounts at optionsXpress (NASDAQ:OXPS) and Schwab's (SCHW) CyberTrader, among others, but those agreements will now be terminated.

optionsXpress has never indicated how many OXPS accounts have come from Investools, but commentary within Investools' release this morning indicates that it anticipates opening at least 15,000 new accounts for Thinkorswim post-deal. Using that as a baseline, the firm believes a reasonable guess is that Investools generated 5,000-7,000 new accounts annually for optionsXpress. Although this figure is only an educated guess on their part, the firm believes it is realistic. Assuming it is correct, it represents about 10% of optionsXpress' annual new accounts.

At this time, they are maintaining thei Strong Buy rating on OXPS shares. The company's growth outlook remains robust beyond this transaction, and given the company's returns on equity and ongoing growth prospects, it deserves to trade at a premium to the group. $35 price target equals 24x 2007 EPS estimate.

Notablecalls: Expect OXPS shares to trade down on the news.

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