By Philip van Doorn, MarketWatch
Returns on invested capital (ROIC) can help identify effective management
U.S. brokers that rely on the discount-trading business model are in play, following Charles Schwab's recent disruptive move to do away with most commissions for online stock trades.
It might be helpful for investors to see which investment banks and broker-dealers have been the best financial performers in recent years. That information is below, based on a screen of data provided by FactSet.
Big broker news
Shares of TD Ameritrade (AMTD) were up 17% Thursday, after CNBC first reported () the company was working on a deal to be acquired by Schwab (SCHW). The Financial Times reported ( ) that Schwab was nearing an agreement to pay $25 billion for TD Ameritrade. Shares of Schwab rose 7%.
MarketWatch's Mark DeCambre shows how the two brokers' businesses match up ().
Another smaller online competitor to Schwab that might have been an acquisition target is E-Trade Financial (ETFC), whose stock was down as much as 10% early Thursday.
Read:Two powerful reasons to pass on investing in a combined Charles Schwab-TD Ameritrade ()
An industry stock screen
A screen of U.S. companies categorized by FactSet as "Investment Banks/Brokers" yields a list of 44 companies. This excludes a large part of the industry.
Financial conglomerates, such as the four biggest U.S. banks (J.P. Morgan Chase (JPM), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC)), all of which have investment banking and brokerage operations, are excluded.
Investment-banking giants Goldman Sachs (GS) and Morgan Stanley (MS) are on the list. The list also excludes asset managers and life insurance companies, many of which provide investment management and brokerage services to their customers.
For Schwab, TD Ameritrade and E-Trade, low commissions are nothing new, although Schwab's recent push to eliminate most online commissions has pushed the entire industry in that direction. These three companies have relied heavily on interest income from deposits that their brokerage customers place in their subsidiary banks. A change in Federal Reserve policy leading to three recent cuts in the federal funds rate has put pressure on this profit center.
All that said, the industry is in flux with the interest-rate challenge, much lower commission revenue, the requirement for very expensive investments in technology and M&A activity. So how can we gauge the group's performance?
One way is to look at their returns on invested capital (ROIC) over the past five full years. FactSet defines ROIC as a company's net income divided by total invested capital (total shareholders' equity and long-term debt). The idea of ROIC is to measure how efficiently a company's managers use the money they have raised.
We pared the list of 44 companies to 25 with market capitalizations of at least $500 million and for which five full fiscal years of ROIC data were available.
Here they are, sorted by average ROIC over the past five full fiscal years:
Company Ticker Average ROIC - past five full fiscal years Market capitalization ($ million)
Cboe Global Markets Inc. US:CBOE 48.3% $13,671
MarketAxess Holdings Inc. US:MKTX 28.0% $15,340
Lazard Ltd. Class A US:LAZ 24.5% $3,926
Evercore Inc. Class A US:EVR 19.8% $3,042
Moelis & Co. Class A US:MC 18.4% $1,642
Houlihan Lokey Inc. Class A US:HLI 14.8% $1,992
TD Ameritrade Holding Corp. US:AMTD 14.0% $22,413
Ameriprise Financial Inc. US:AMP 12.1% $20,066
Charles Schwab Corp. US:SCHW 11.2% $57,382
Interactive Brokers Group Inc. Class A US:IBKR 8.6% $3,626
Intercontinental Exchange Inc. US:ICE 8.4% $52,611
CME Group Inc. Class A US:CME 8.3% $74,052
LPL Financial Holdings Inc. US:LPLA 7.9% $7,379
INTL FCStone Inc. US:INTL 6.9% $755
E-TRADE Financial Corp. US:ETFC 6.8% $10,361
Virtu Financial Inc. Class A US:VIRT 6.3% $1,960
Stifel Financial Corp. US:SF 5.0% $4,203
Nasdaq Inc. US:NDAQ 4.9% $17,326
B. Riley Financial Inc. US:RILY 4.2% $770
BGC Partners Inc. Class A US:BGCP 3.4% $1,708
Morgan Stanley US:MS 2.7% $79,473
Goldman Sachs Group Inc. US:GS 2.6% $77,159
Ladenburg Thalmann Financial Services Inc. US:LTS 2.2% $518
Piper Jaffray Cos. US:PJC 1.8% $1,137
Jefferies Financial Group Inc. US:JEF 1.0% $6,090
You can click on the tickers for more about each company, including business profiles, which vary widely.
Leaving the list in the same order, here's a summary of sell-side analysts' opinions of the stocks. Price targets and closing prices are as of Nov. 20, which means they are outdated for Schwab and TD Ameritrade, at least.
Company Ticker Share 'buy' ratings Share neutral ratings Share 'sell' ratings Closing price - Nov. 20 Consensus price target Implied 12-month upside potential
Cboe Global Markets Inc. US:CBOE 40% 53% 7% $123.32 $121.00 -2%
MarketAxess Holdings Inc. US:MKTX 0% 82% 18% $404.49 $325.00 -20%
Lazard Ltd. Class A US:LAZ 33% 45% 22% $37.38 $39.50 6%
Evercore Inc. Class A US:EVR 67% 33% 0% $77.84 $91.38 17%
Moelis & Co. Class A US:MC 62% 38% 0% $33.27 $39.75 19%
Houlihan Lokey Inc. Class A US:HLI 62% 38% 0% $47.70 $52.71 11%
TD Ameritrade Holding Corp. US:AMTD 37% 42% 21% $41.38 $39.43 -5%
Ameriprise Financial Inc. US:AMP 69% 31% 0% $158.38 $171.20 8%
Charles Schwab Corp. US:SCHW 42% 47% 11% $44.75 $43.20 -3%
Interactive Brokers Group Inc. Class A US:IBKR 50% 33% 17% $47.24 $51.40 9%
Intercontinental Exchange Inc. US:ICE 78% 17% 6% $94.48 $102.82 9%
CME Group Inc. Class A US:CME 33% 50% 17% $206.64 $216.06 5%
LPL Financial Holdings Inc. US:LPLA 42% 58% 0% $91.29 $94.11 3%
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November 22, 2019 07:56 ET (12:56 GMT)
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