Ameritrade’s Earnings Will Lean On Mobile Growth And Derivatives For Growth

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Online brokerage firm Ameritrade (NYSE:AMTD) is expected to announce earnings for the fiscal fourth quarter of 2012 on Tuesday, October 30. Tepid investor confidence in the face of uncertainty in the U.S. markets before the general elections has greatly affected the company’s trading business. Daily Average Revenue Trades (DARTs) for August were down 37% from the same month last year at 303,000, a decline of 9% from July 2012. Interest-based revenues have also been influenced by the Fed’s zero interest rate policy.

Our $18 price estimate for Ameritrade’s stock is at a premium of 15% to the current market price.

See Our Full Analysis for : Ameritrade|Charles Schwab|E*TRADE Financial

Mobile And Derivatives Trading To Offset Decline In Equity Trades

Ameritrade is quite reliant on trading activity as trading commissions account for about 45% of the company’s net revenues. Facing a decline in trading activity, the company is turning to a tiered platform strategy and product diversification to wade through a period of low market volatility. Mobile trading holds the key to its future growth as the company reports an average of 1,500 new mobile users added to its network each day. Mobile trades accounted for 7% of the trades executed via Ameritrade in the June quarter and are set to grow further as investors turn to the technology to make trades on-the-go.

Derivatives trading volume was also a positive metric which observed 7% year-on-year growth last quarter, mitigating the effect of a 10% fall in equity trading. Derivative trades accounted for 37% of Ameritrade’s trades in the June quarter. As customers tend to be more cautious in their investing strategies, in the wake of the prolonged European debt crisis, derivatives trading may once again hold the center stage this quarter.

We expect trade volumes to gradually pick up over the next few years as global macro-economic conditions improve. You can gauge the effect of a change in forecast by modifying the interactive chart below.

Ameritrade added more than 150 million new client assets per business day in the three months ending June. This trend continued in July and August with total client assets at the end of August at $461.2 billion, up 15% from August 2011. Consolidating the client assets will help Ameritrade set up a solid base for future growth once interest rates increase.  Interest rate sensitive assets, which include money market mutual funds (6% of total interest sensitive assets), interest earning assets (18% of total interest sensitive assets) and cash held in FDIC-insured deposit accounts (IDA) grew 7% year-on-year to $79 billion at the end of last quarter.

We forecast a flat yield curve in the near future with a long-term recovery coinciding with increasing interest rates.

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