Siebert is a well-known discount broker, offering retail investors a comprehensive online platform to conduct research and execute stock trades at competitive prices. The company also maintains a broad inventory of fixed income securities and markets a full-suite of retirement and college funding accounts. Through its Siebert fundexchange program, clients also have access to nearly 13,000 mutual funds. In addition, the firm provides equity trading services for institutional clients, as well as investment banking through its Capital Markets division.

Siebert was founded nearly forty years ago by Muriel Siebert, the first woman to become a member of the New York Stock Exchange (NYSE). Along with Charles Schwab, the firm was among the industry's pioneering discount brokerage houses, and it has since been named one of the top discount brokers by prominent financial publications such as Kiplinger's and Barron's. Siebert is perhaps best known for its dedication to meeting the needs of women investors, and its award-winning Women's Financial Network site is a widely respected source of financial services geared for women.

Like any discount broker, Siebert's fortunes are inextricably linked to the health of the overall stock market. As the market has gradually recovered over the past couple years, increased trading volumes have helped lift the company's commission-based business. After reporting double-digit top-line growth last year, revenues in the most recent quarter jumped +30% to $8.0 million. Most of the improvement was driven by a +20% increase in commissions and fees -- which represent three-fourths of total revenues -- as well as sharply higher investment banking revenues. Meanwhile, earnings tripled from $0.01 to $0.03 per share over the same period.

In this rapidly consolidating industry, Siebert appears to be an attractive takeover candidate. Founder and CEO Muriel Siebert holds more than 90% of the outstanding shares, and given her age of 70+ and the company’s lack of solid internal growth, it wouldn't be surprising to see a sale or merger announced at some point in the future. The firm is in excellent financial health, with a clean capital structure, a $33 million stockpile of cash, zero long-term debt, and virtually no share dilution over the past five years. All of this only increases the company's appeal as a potential takeover target.

Given the recent consolidation in the industry, it seems apparent that the biggest names in the industry have discovered that it is far more cost-effective to gain new clients via acquisitions than to generate them through internal means. In fact, Ameritrade reported last year that the advertising costs necessary to land a single new account totaled nearly $250.

With an established base of clients and a substantial amount of assets under management, Siebert might make a good fit for a larger company. Certainly the pool of quality candidates -- which once numbered in the hundreds -- has been drawn down considerably in recent months. Ameritrade has swallowed the accounts of J.B. Oxford and T.D. Waterhouse over the past year, while E*Trade has recently completed deals with BrownCo and Harrisdirect.

Even if the company is not yet ready to put itself on the auction block, there are other reasons to like SIEB. To begin, the shares have fallen steadily over the past five years, and are currently trading more than -40% below their 52-week high. Earlier this month, the stock tumbled -14% on run-of-the-mill news that a former executive exercised his stock options. This act has virtually no bearing on the company's financial performance, nor should it be considered a red flag, as options are routinely exercised and then sold for any number of reasons. 

After this sharp -- and in my opinion unjustified -- pullback, Siebert's valuation level is beginning to look compelling. Here's how SIEB stacks up against the industry averages on a host of different valuation metrics:

Let's drill down deeper to get a better look at the stock's valuation. With around 22 million shares outstanding and a current price of $2.54, Siebert has a market cap of roughly $56 million. The company has a cash balance of more than half that amount -- $32 million, or $1.45 per share. Assuming liabilities of $6.24 million, or $0.28 per share, the company has an adjusted Enterprise Value of $1.37 per share. Over the past twelve months, the company has generated cash flows of $1.8 million (or $0.08), which gives the stock a respectable operating cash flow yield (Cash Flow/Enterprise Value) of nearly 6%.

Competition in the discount brokerage sector has been intense, with one round of price wars after another slashing commissions and crimping profits. Many of Siebert's former competitors have been acquired, and some are no longer in business at all. With an established book of business, a valuable and well-respected brand name, and a stellar financial position, the stock may well be on a larger firm's radar screen.

However, there is another possible catalyst that could trigger a sharp rally in the shares. Siebert has filed a lawsuit against Intuit for "not less than $11.1 million in compensatory damages and $33.3 million in punitive damages." I won't delve into the specifics of this litigation, but a possible favorable ruling could lift the shares. With this in mind, anyone interested in the stock may want to research this matter further.

To a certain extent, a largely transaction-based broker such as Siebert is an indirect play on the health of the overall market. Those banking on stronger performance in the years ahead -- which will in turn encourage increased trading and underwriting activity -- may want to consider taking a look at Siebert.

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Important Note: The above article was merely a small excerpt from a recent issue we sent to subscribers of our premium value investing service -- Margin-of-Safety Investing. In each issue of that newsletter, editors Nathan Slaughter and Paul Tracy deliver an in-depth look at a variety of other deeply discounted stocks that should provide investors with a solid margin of safety at current prices. To receive your copy of our most recent issue of Margin-of-Safety Investing, as well as other guidance similar to this twice per month, you'll need to subscribe to this publication. To learn more, please visit:
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