TD Ameritrade Earnings Preview: Increasing Trading Activity To Drive Quarter

TD Ameritrade (NYSE:AMTD) is scheduled to report its fiscal second quarter earnings on April 23. The brokerage’s revenues grew by over 15% year-on-year (y-o-y) in 2013. The top-line growth was mainly driven by a 29% y-o-y increase in revenues from investment product fees and a 28% increase in trading commissions in the calendar year 2013. Given that most expenses incurred by brokerages are fixed in nature, revenue growth contributes significantly to bottom-line growth, due to which the company posted healthier margins in 2013. ^[1]

According to our analysis, the company’s adjusted EBITDA margins for 2013 improved by over 3 percentage points to 45.5% compared to 2012. This figure could further improve for the quarter considering that there has been growth in trading activity as also witnessed by other brokerages such as Charles Schwab (NYSE:SCHW) and E*TRADE Financial (NASDAQ:ETFC). We expect Ameritrade to deliver strong quarterly results based on the continued growth in trading volumes and improving EBITDA margins. We have a $33 price estimate for Ameritrade’s stock, which is slightly higher than the current market price.

See our full analysis for TD Ameritrade

Trading Activity On The Rise

In 2013, Ameritrade’s daily average client trades were up by 12% to over 390,000 trades a day. In the first two months of 2014, Ameritrade’s daily average has gone up to nearly 500,000 trades per day – a jump of more than 20%. Additionally, the number of funded accounts breached the 6 million mark in December 2013, more than the full year average of about 5.7 million accounts. ^[2] The increase in brokerage accounts is a strong positive for Ameritrade’s trading commission revenue. The company is likely to witness a continued increase in trading volumes in the coming quarters. The increasing trading activity will not only contribute to growth in revenues, but also significant addition to net income since the expenses incurred by the company are fixed in nature.

Investment Product Fees And Net Interest Revenues Likely To Grow

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 first two months of 2014, the company’s average investment product balance remained nearly flat over the previous quarter. However, we expect the company to maintain a growth rate of over 20% in investment product revenues for the full year since we expect the yields on investment products to improve.

In the last few quarters, the company’s insurance deposit assets (IDA) have been somewhat flat, and the trend continued in the first two months of the current quarter as well. After declines in the yield on IDA or money market account balances since 2008, we expect it to bottom out and gradually going forward, as the Fed has initiated its QE tapering program. Comparatively, there has been a 5% sequential increase in the average interest earning assets in the quarter so far since the company has been able to attract more clients. Looking ahead, we expect the yield on interest-earning assets to increase in addition to a growing asset base, leading to higher revenues in this segment.

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1. TD Ameritrade Q1 2014 Earnings Call Transcript, Seeking Alpha, January 2014 [↩]
2. Ameritrade Monthly Metrics, Ameritrade Investor Relations, April 2014 [↩]