Online brokerage firm Ameritrade (NYSE:AMTD) has had a tough 2012. An uncertain global economic environment has led to a decline in trading activity. At the end of November, revenue generating daily average trades, also known as DARTs, were 341,000, down 10% from November 2011. Low trading volumes are particularly bad news for the company, which derives nearly 40% of its revenues from commissions and transaction fees. Its competitors E*TRADE Financial (NASDAQ:ETFC) and Charles Schwab (NYSE:SCHW) are better suited to ride through the dip in trading volumes as both derive just around 20% of their revenues from trading commissions.
Coinciding with a drop in trading volume, Ameritrade’s stock has also declined, falling nearly 20% since the end of March. We believe the stock is now fairly valued. Our $16 price estimate for Ameritrade’s stock is in-line with the market price.
Asset Management Pulling Through
The increase in asset-based revenues helped mitigate the effect of declining trades in the last fiscal year with net revenues for the twelve months ending September down just 5% from 2011. Ameritrade earns 40% of its revenues from asset management fees from clients using its money market account services to invest in mutual funds and from those using its cash management services. Interest revenue is generated through margin lending and accounts for about 17% of the company’s net revenues. The remaining revenues are earned from education services, miscellaneous securities brokerage fees and annuities.
Ameritrade reported a 22% increase in client insured deposit account balance and a 16% increase in average market fee-based investment balance in the last fiscal year, leading to a 9% increase in IDA fees and 18% increase in investment product fees. Ameritrade has seen healthy growth in client assets under management in the last few years despite the tough macro-economic conditions and we expect this trend to continue through our forecast period.
Trading To Recover?
Although its daily trading volume for the fiscal year ending September was down 11% from 2011, Ameritrade has seen signs of a trading recovery in the last three months. In September, daily average revenue trades (DARTs) increased 17% over August. A similar increase was observed by peer Charles Schwab. The company has been quite successful in attracting new clients, opening 190,000 new accounts in the September quarter, the highest number of new accounts opened in a quarter since the first quarter of 2010. Trading activity is still low, but we expect a gradual recovery as global macro-economic conditions improve and opening new accounts will help in this regard. We also expect the Federal Reserve’s measures to stimulate the U.S. economy to help trading activity going forward as this could boost sentiment. You can modify the interactive chart below to gauge the effect that a change in forecast will have on our price estimate.