TD Ameritrade (NYSE:AMTD) is scheduled to release its Q1 fiscal 2014 quarterly earnings on January 21. The company has been performing well over the past few quarters, as trading volumes have started to recover from their historic lows, and the number of client accounts and assets continue to rise. Last quarter, it reported a 10% growth in net revenue, driven by trading commissions (+20%) and investment product fees (+26%). At the same time, spread based revenue remained resilient despite a compression in yields. We expect the growth in revenue to continue in Q1, as the company has reported a strong increase in all of its reported operating metrics through November. The recent commencement of the Federal Reserve’s QE tapering program is also likely to positively impact the company’s spread-based revenue by the stemming the rate of yield decline.
However, the market may be overpricing the stock currently, as according to our model, the stock is fairly valued at around $26 per share, which is around 17% below the current market price. We believe that the company’s client assets and profit margins will have to increase considerably faster than our forecasts in order to justify its current stock price.
Client Accounts and Assets Continue to Soar
2013 was the fifth consecutive year in which Ameritrade reported a double digit growth in net new assets. At $50 billion, its net new asset tally for FY2013 (Ameritrade’s fiscal year ended in October 2013) was a record performance, and the trend seems to be showing no signs of slowing.  According to the company’s reported monthly metric data, its client asset tally in November 2013 was almost 23% higher than the figure reported same period last year. While some of this performance may be due to market action, a large part of this growth can likely be attributed to the continued addition of new clients, similar to the last few quarters.
The growth in assets is likely to be a tailwind for the brokerage’s asset based revenues, and act as an offsetting force to compressing yields. As of November 2014, Ameritrade’s average spread balances ($89.9 billion) and average fee based balances ($130.9 billion) were at their highest levels since at least October 2009. The boost to spread based revenue is likely to be even bigger when interest rates eventually begin to rise – yields on these spread-based assets are strongly correlated with the interest rates prevailing in the markets.
Transaction Volumes Are Also Beginning To Recover
Trading volumes dropped to historic lows in the aftermath of the financial crisis, and have remained a point of difficulty for the brokerage sector over the past several years. The drop can be broadly attributed to a decline in the average number of trades executed by a typical client, and this trend doesn’t seem to be quickly reversing. According to our estimates, the average number of trades executed in a typical account per year declined from almost 23 in 2009 to just 15.7 in 2012.
However, online brokerages have been able to add new accounts at a rapid pace to somewhat offset the negative impact from declining average trades per account. Last quarter, Ameritrade posted a 20% year-on-year jump in trading commissions as the number of brokerage accounts on its platform increased almost 7% over the year-ago period. We expect the trend to continue in the upcoming earnings release as well. Ameritrade’s overall daily average trading volume was up year-on-year by 27% and 22% in October and November. Although the company does not report its brokerage account tally on monthly basis, we believe that it is one of the biggest factors behind the growth in overall trading volume, similar to Q4 2013.Notes:
- TD Ameritrade Delivers 5th Consecutive Year of Double-Digit Net New Client Asset Growth Rate, TD Ameritrade, October 29, 2013 [↩]