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TD Ameritrade (NYSE:AMTD) posted a better-than-expected increase in its top line in its fiscal Q1 2014 earnings release on January 21. Its total revenue increased almost 15.5% over the year-ago quarter, led by trading commissions (+28%), investment product fees (+29%) and net interest revenue (+9%). For the calendar year 2013, the brokerage’s net revenue grew at a rate of almost 9% according to our estimates. The strong increase in revenue also bumped up margins – we estimate that Ameritrade’s adjusted EBITDA margin for calendar year 2013 was 45.5%, compared to just 42.2% in the previous year.
Given the higher-than-expected growth in revenue and EBITDA margins, we are revising our price estimate for Ameritrade’s stock from $26 to nearly $33, which is about in line with the current market price.
Transaction-Based Revenues Are Increasing
Over the last few years, brokerages have been stung by low trading volumes, but the trend seems to be changing as these companies continue to attract new clients, and retail investors have been increasing their trading frequency. Ameritrade’s investor movement index, which records retail investor sentiment, ended 2013 at its highest level in four years, signaling renewed enthusiasm among its clients. At the same time, the daily average number of unique client account log-ins increased 9%, while the average number of accounts in which trades were executed during the quarter jumped 19% over the year-ago period. If we look at trading volumes so far this year, the trend seems to have continued in 2014. According to management, Ameritrade recorded an average of 467,000 trades per day in the first three weeks of January, the highest level compared to the same period in any other calendar year.  Although the company has not yet revealed the growth in its brokerage accounts over the quarter, we believe that it is one of the major reasons for the growth in trading volumes, similar to the last few quarters. We expect Ameritrade’s overall trading volumes to continue increasing over the next few years on the back of higher client relationships and increasing trading activity per client.
Asset Growth Continues To Drive Investment Product Fees And Net Interest Income
Over the past several years, Ameritrade has also done a good job of attracting client assets onto its platform. As mentioned in our pre-earnings note, FY 2013 was the fifth consecutive year in which Ameritrade reported a double-digit growth in net new assets, and the momentum does not seem to be slowing anytime soon. In Q1 2014, it attracted $14.5 billion worth of new assets from its clients on a net basis, making it the second-best quarter in the company’s history. The growth in assets acts as a strong tailwind for its asset-based revenue streams such as investment product fees (+29%) and net interest revenue (+9%). Over the next few years, we expect these revenue streams to continue increasing on the back of asset base growth. Further, we expect the growth in net interest revenue to be higher than what is seen currently due to an increase in the yields. Typically, these yields are correlated with benchmark interest rates, and have trended lower over the past few years due to the Fed’s QE program. However, with the commencement of QE tapering, the yield decline seems to be slowly reversing. Management cited rising net interest margins as one of the drivers for the growth in net interest revenue this quarter.Notes:
- TD Ameritrade’s CEO Discusses F1Q 2014 Results – Earnings Call Transcript, SeekingAlpha, January 21, 2014 [↩]