TD Ameritrade (NYSE:AMTD) reported its earnings for FY2013 on October 29. As expected, the company continues to show strong organic growth despite the uncertain macroeconomic conditions – its net revenue for Q4 was $709 million, an increase of 10% over the same period last year. Transaction-based revenue grew by 20% and remained the biggest driver of this performance, while investment product fees, a much smaller revenue source, also contributed positively by growing 26% year-on-year. Meanwhile, spread-based revenue remained resilient to the compression in yields – it declined just 1% despite a 25 basis point drop in net interest margin. 
We are optimistic about Ameritrade’s future growth, and believe that the headwinds faced by it in the past few years – declining net yields and slow trading activity - may be slowly weakening. Our price estimate for its stock is around $26, slightly below its current market price.
Asset Growth Continues To Drive Performance
As discussed in our pre-earnings article, the brokerage industry has been ailing from the low interest rate environment for quite some time. However, Ameritrade has withstood these issues relatively well due to its rapid asset gathering activity. In this past quarter, the brokerage attracted almost $10 billion in net new client assets, making FY2013 the fifth consecutive year of double-digit net new asset growth. Its average spread-based asset balances increased by 16.5% year-on-year, and softened the blow from a 25 basis point drop in net interest margin. ((Press Release, Ameritrade, October 29, 2013))
Going forward, we expect Ameritrade’s spread-based revenue to start growing again as it continues to attract more assets and the rate of interest rate compression slows down. The U.S. Federal Reserve’s decision to taper its QE program, expected to come by next year, is likely to be a key tailwind for interest rates. The company’s management also believes that they may have already hit the lowest point in terms of net yields. 
Trading Volumes Are Also Recovering
Ameritrade’s other major revenue stream – trading commissions – also seems to be recovering from the unusually low levels of 2012 on the back of a larger client base, higher trading activity, and higher commissions per trade. In Q4, the number of funded accounts at Ameritrade increased by 229,000 over the same period last year, while the number of trades executed in a year by a typical Ameritrade client increased from 14.3 in the year-ago period to 15.9. Average commissions per trade increased by $0.14 on the back of stronger payment for order flow, especially in the options trading business.
Going forward, we expect Ameritrade’s trading commissions to keep growing as it continues to attract new clients, as existing clients start trading more often, and as the average commissions per trade continue to increase. The growth in its client base is likely to be driven by Ameritrade’s marketing efforts, while the improvement in trading activity is likely to be a function of improving investor sentiment. The average commissions per trade have been growing in the recent past due to the increasing popularity of options trading, and the company’s management expects this trend to continue in the near term. Over the long term, however, we expect competitive pressure to take hold again, resulting in a decline in average commissions. ((TD Ameritrade Holding Management Discusses Q4 2013 Results – Earnings Call Transcript, SeekingAlpha, October 29, 2013)) (read: New baby boomer hobby: trading options)Notes:
- Press Release, Ameritrade, October 29, 2013 [↩]
- TD Ameritrade Holding Management Discusses Q4 2013 Results – Earnings Call Transcript, SeekingAlpha, October 29, 2013 [↩]