Ameritrade Releases November Trading Metrics, Strong Outlook For Year-End

Online brokerage TD Ameritrade (NYSE:AMTD) released its operating metrics for November, reporting a sequential decline in trading activity after a surge in October. However, on a year-over-year basis the brokerage had a positive month in terms of gaining net client assets and a rise in trading activity. In its fiscal year ended September, Ameritrade witnessed significant growth in all its major revenue streams – commission and transaction fees (+15%), interest-based revenue (+24%) and asset-based revenues (+12%) – largely driven by an increase in trading activity and a gain in client assets complemented by rise in yield rates. Continuing the trend from the previous fiscal year, Ameritrade’s trading metrics and assets under management have improved through Q1 Fy 2015 thus far. Below we take a look at some key metrics for Ameritrade and our forecasts for these metrics.

We have a $33 price estimate for Ameritrade’s stock, implying a 10% discount to the current market price. Ameritrade’s stock price has risen by nearly 10% since its Q4 Fy 2014 earnings at the end of October.

See our full analysis for TD Ameritrade

Rise In Trading Activity, Albeit Slower Than October

Trading activity was up in October, primarily due to the increased level of volatility in the market, especially derivatives trading. Major global exchanges such as CME Group (NASDAQ:CME) and NASDAQ OMX Group (NASDAQ:NDAQ) reported both sequential and annual increases in contracts traded during October, with interest rate and foreign exchange derivatives contributing significantly to the growth (see: Can CME Keep Up Trading Momentum?) Furthermore, NASDAQ reported a 34% y-o-y increase in the number of shares traded on its U.S. platform in October. ^[1] Corresponding to these metrics, the average trades per day on Ameritrade’s platform were up by 18% year-on-year to 494,000 trades per day in October.

Although Ameritrade’s trades per day in November fell from October levels, the 428,000 trades per day in November were 3% higher than the prior year period. The total number of funded accounts at the brokerage stood at over 6.3 million accounts at the end of September, about 5% higher than the year-ago period. ^[2] As a result, the number of trades per account in the quarter ended September stood at just over 4 trades per account for the quarter. We currently forecast Ameritrade’s annualized trades per account to be 17.6 trades per funded account for the calendar year 2014.

Ameritrade management mentioned that the number of trades on the brokerage’s mobile platform accounted for 13% of total trades – up from just 3% of total trades back in 2010. In the most recent quarter, the number of trades rose by 60% year-over-year to over 3 million trades conducted via the mobile platform. The brokerage intends to focus on the mobile segment and enhance its user experience. With mobile trading on the rise, it is imperative for established large brokerages to provide mobile trading tools and capabilities to its customers as a safeguard against upcoming companies that are targeting this particular market segment (see Can Zero-Commission Trading App Robinhood Challenge Large Brokerages?).

Asset Base Continues To Grow

Ameritrade’s average client balances were 13% higher than the year-ago period at $19.9 billion for the month of November. In the most recent quarter, the net yield on these assets rose, due to which revenues generated by interest on these balances grew by 34% y-o-y to $159 million for the quarter. This was the third consecutive quarter of revenue growth of more than 25% in this division. The implied yield on these assets was almost 50 basis points higher than the prior year quarter at 3.26%. We currently forecast the average yield for the year to be around 3.21% and resulting revenues to be 21% higher than the prior calendar year at over $580 million.

The other fast-growing revenue stream for Ameritrade this year has been investment product fees, or the fees charged for its services on money market mutual funds and other funds. The brokerage’s total fee-based asset balance rose to $153 billion by the end of November – nearly 17% higher than the balance at the end of November 2013 and 5% higher than the average balance at the end of its fiscal 2014. Investment product fee revenues have witnessed double-digit y-o-y growth in eight successive quarters, with a year-to-date average growth rate of over 20% on an annual basis. Going forward, we expect the company to continue to attract clients at similar rates through the end of this calendar year, which could lead to significant growth in investment product fee revenues.

According to our estimates, TD Ameritrade’s adjusted EBITDA margin improved by nearly 3 percentage points over the year-ago period to over 48% in the first three quarters of the current calendar year. The revenue growth was largely responsible for the margin improvement as most expenses remained flat. The only major rise in the company’s operating expenses was in compensation and benefits costs, which rose by nearly 15% to $195 million during the quarter. Employee compensation and benefits expenses grew mainly on account of the brokerage increasing its employee headcount to cater to the rise in trading volumes and investments. Going forward, the brokerage should continue to witness an improvement in margins in the current quarter, as the increase in trading commissions and asset-based revenues are likely to boost Ameritrade’s net revenues.

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1. NASDAQ OMX Monthly Trade Metrics For October, NASDAQ OMX  Investor Relations, November 2014 [↩]
2. Ameritrade Monthly Metrics, Ameritrade Investor Relations, December 2014 [↩]