Growing trade volumes and a greater asset base contributed to a strong year for brokerage firms in 2013. TD Ameritrade’s (NYSE:AMTD) stock price rose by 15% last year with a significant contribution from a 15.5% year-on-year increase in revenues. The top-line growth was mainly driven by a 29% y-o-y increase in revenues from investment product fees and a 28% growth in trading commissions in the calendar year 2013. The company also posted healthier margins during the year, which management attributed to growing trade volumes with relatively flat expenses.  According to our analysis, the company’s adjusted EBITDA margins for 2013 improved by over 3 percentage points to 45.5%.
Based on the continued growth in trading volumes and improving EBITDA margins, we have revised our price estimate for Ameritrade’s stock to $33, which is slightly lower than the current market price.
Asset Growth Helps Net Interest Income And Investment Product Fees
Revenues generated by marketing, record-keeping and support services on insured deposits in money market accounts grew by almost 30% to $266 million last year. The growth in these investment product fee-based revenues can be attributed to a 31% increase in the average investment product balance during the year, which stood at almost $120 billion. In the short term, we expect the company to maintain a growth rate of around 20% for total fee-based investment balances, which it observed from 2009-13.
Benchmark interest rates have been low in the last few years due to the Fed’s policies such as the QE program, which kept the company’s yield on investment products low. But with the Fed commencing its QE tapering program recently, yields could gradually pick up. According to our estimates, the yield on investment products could reach pre-2008 figures of over 0.4% by the end of our forecast period. However, if the yield rates grow more rapidly in the short term and cross the 0.4% mark by the end of next year, there could be a 6% upside to our price estimate.
TD Ameritrade reported its fifth consecutive year of double-digit growth in net new assets at the end of fiscal year 2013. However, revenues generated from money market accounts declined by almost 3% to $807 million. This was brought about by a 0.2% y-o-y drop in yield, which more than offset a 15% increase in money market account average balance for the year. After continual declines in the yield on money market account balances since 2008, we expect it to bottom out and gradually increase from 2015 as the Fed has initiated its QE tapering program.Notes: