Coverage Launch: $22 Trefis Price Estimate for Ameritrade
Ameritrade (NYSE:AMTD) is an online brokerage that allows individual investors to trade equities, options and other securities. Ameritrade also offers money market account services to clients through TD Bank USA. It competes with other online brokerages and financial services firms like E-Trade (NASDAQ:ETFC), Charles Schwab (NYSE:SCHW), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC).
We recently launched coverage on Ameritrade with a $22.65 price estimate for the company’s stock.
Launch of Coverage on Ameritrade; $22.65 Price Estimate
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We have broken down our analysis of Ameritrade into five divisions:
- Interest on Money Market Balances
- Interest on Other Balances & Securities
- Trading Commissions
- Investment Product Fees
- Maintenance & Service Fees and Others
Ameritrade’s Strength in the Brokerage Industry
Interest on money market balances contributes about 43% of Ameritrade’s value. A money market deposit account (MMDA) is like a savings bank account where clients deposit money and in return earn a slightly higher interest rate on it.
MMDAs became a source of revenue for Ameritrade in 2006 resulting from an agreement with TD Bank USA. Ameritrade receives a fee from TD Bank for providing marketing, record keeping and support services for their money market deposit accounts. The fee is based on the yield earned on the client assets less the actual interest paid to clients, a flat fee to the banks of 25 basis points and the cost of FDIC insurance premiums.
The net yield for Ameritrade from an MMDA was as high as 4% in early 2008, before it fell to under 2% in 2009. We believe that the interest rate will gradually increase over the years to reach the highs it achieved in the pre-recessionary years. Moreover, the increasing popularity of an MMDA over normal savings account among clients due to the higher interest offered is also a significant advantage for Ameritrade.
We expect the balance in MMDA accounts to grow by at least 5% annually for the years to come, making it the biggest driver for Ameritrade’s value. The fact that Ameritrade’s MMDA services has EBITDA margins as high as 50% also adds significantly to the value of this division.
See the complete $22.65 Trefis price estimate for Ameritrade’s stock.