TD Ameritrade Holding Corp. (NYSE:AMTD) reported a 2.3% year-on-year decline in profits to $153.8 million for the third fiscal quarter of 2012.  Uncertainty over the European economic crisis and macro concerns regarding the U.S. market eroded investor confidence as trading activity fell 6% from 370,000 trades per day in 2011 to 325,000 in the present year.
This trend might be set to continue in the near future, with the daily average for July down to 319,000 – a decline of 12.4% over the same period last year. Industry peers Charles Schwab (NYSE:SCHW) and E*TRADE Financial (NASDAQ:ETFC) are facing similar pressures from the trading slump, but Amteritrade is trying its best to maintain organic growth.
We discuss below a few trends that influence our $20 price estimate for Ameritrade’s stock, which is 25% ahead of the current market price.
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Derivatives Trading, which accounts for 37% of Ameritrade’s Daily Average Revenue Trades (DARTs), saw a 7% year-on-year growth, while equity trading fell 10% during the same period. Derivatives offer higher returns in a volatile market compared to equities, and we expect this number to continue to grow in the coming months as investors are drawn to Ameritrade’s innovative technology platforms such as the thinkorswim mobile platform and the popular Trade Architect.
Ameritrade has taken several initiatives (See: Ameritrade Heads To $20, Offers Tasty Market Analysis) to capitalize on the mobile phone boom witnessed in the last few years. These investments are paying off as DARTs executed through mobile phones have climbed at a steady rate. The company reported an average of 1,500 new mobile user additions to its network each day. Although the technology is still in a nascent phase, mobile DARTs already account for 7% of daily trade volumes and are set to grow as mobile phones offer great portability to investors on the go, allowing customers to adjust their strategy quite conveniently in a volatile market.
Ameritrade derives 37% of its value from trading commissions, according to our analysis. Despite the recent drop in overall trade, we expect the volumes to gradually pick up over the next few years as the global macro-economic conditions improve. You can gauge the effect of a change in the forecast by modifying the interactive chart below.
Addition To Client Assets
With low interest rates set to continue leading to a flattened yield curve and a subsequent compression in net interest margin,  Ameritrade is focusing on consolidating its client assets under management. The company added more than 150 million new client assets per business day through the quarter – which is its highest rate ever. Net new client assets reached 31 billion, year-to-date, at an annualized growth rate of 11%. We expect this trend to continue as clients seek to move cash into the market in an uncertain environment.
Breakaway Brokers Headed For Ameritrade
Due to market uncertainty, a number of investors are seeking advice from registered investment advisers (RIAs) who use Ameritrade’s platforms for trading. Brokers are following their clients’ footsteps in leaving full-commission firms and are heading toward the RIA model.  Ameritrade reported an addition of 120 breakaway brokers last quarter, a 50% year-on-year increase. Through the year, the company has attracted over 300 such brokers, a growth of 23% from last year. We expect the growth in brokerage accounts to continue through our forecast period.Notes:
- TD Ameritrade Holding Corporation CEO Discusses F3Q12 Results – Earnings Call Transcript, Seeking Alpha, 17th July, 2012 [↩]
- Forecasts Hint Fed Might Change Rate Guidance, Wall Street Journal, 26th June, 2012 [↩]
- TD Ameritrade Institutional Draws Breakaway Brokers at Record Pace, Press Release, July 17th, 2012 [↩]