Ameritrade (NASDAQ:AMTD) announced its fiscal second quarter results on Tuesday, and as expected, low interest rates and trading volumes resulted in a decline in earnings for the quarter. These results were largely in line with expectations, as difficult market conditions have pressured recent earnings for other brokerages such as Charles Schwab (NYSE:SCHW). Ameritrade’s earnings declined by 20% on a year-over-year basis, as average daily trades declined nearly 12% from the prior year period and average revenue per trade dropped from $12.42 to $12.15. 
We have a price estimate of about $20.50 for Ameritrade’s stock, which is about 10% ahead of the current market price. We are revisiting our forecasts to incorporate these earnings as well as the short-term outlook.
Trading Activity Down, Client Assets Up
While Ameritrade saw trading activity decline on a year-over-year basis, it was up sequentially and the company added nearly $11 billion in new client funds during the quarter. These new assets should drive net interest income, which is earned by investing client assets primarily into money market accounts, and help partially offset the current near-zero interest rates. According to Trefis estimates the company derives about 35% of its value from interest earned on money market balances. The chart below shows the company’s client money market balances, which we forecast to exceed $70 billion by 2018.
We expect that Ameritrade’s net interest yield – the interest rate that it earns by investing client assets, expressed as a percentage of assets – will remain remain depressed over the next few years given that the Federal Reserve has stated that it plans to keep interest rates near zero until 2014. However Ameritrade has done a good job of bringing in new client assets, and should trading activity pick up we believe the company will be well-positioned to withstand the low-rate environment.Notes: