TD Ameritrade Can Bank On Healthy Trading Metrics To Drive Earnings

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AMTD IDEA Group

TD Ameritrade (NYSE:AMTD) is scheduled to announce its fiscal second quarter earnings on Tuesday, April 21. The brokerage firm reported a 9% year-on-year (y-o-y) growth in net revenues to $819 million in the December quarter, with growth coming from both its asset-based business, which grew by 11% y-o-y to $451 million, and trading commission revenues, which grew by 9% to $359 million. ((TD Ameritrade Q1 2015 Earnings Call Transcript, Seeking Alpha, January 2015)) Within combined asset-based revenues, net interest revenues on client assets grew by 27% over the prior year quarter to $161 million, while investment product fee revenues rose by 15% over the prior year quarter to $83 million. On the other hand, revenues from insured money market deposits stayed flat over the prior year period at $207 million for the quarter.

Ameritrade has enjoyed a sustained period for high trade volumes through January and February, as evidenced by its monthly operating metrics. The brokerage’s trade volumes have been high since the beginning of this year with an average of over 485,000 trades per day, compared to 457,000 trades per day in the December quarter. We have a $34 price estimate for Ameritrade’s stock, which is slightly lower than the current market price. Ameritrade’s stock price has risen by over 10% since the company reported its Q1 FY 2015 earnings in late January.

See our full analysis for TD Ameritrade

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Trading Momentum Continues Through January, February

Ameritrade’s average trades per day in 2014 stood at stood at 438,000 trades per day, about 11% higher than the previous year. The total number of funded accounts at the brokerage was over 6.37 million accounts at the end of 2014, which was about 5% y-o-y growth. ((Ameritrade Monthly Metrics, Ameritrade Investor Relations, March 2015)) Based on these numbers, the average implied number of trades per account stood at about 17.7 trades per account for the full year. Trading activity has picked up in 2014, due to which we forecast Ameritrade’s annualized trades per account rise to about 18.5 trades per funded account for the calendar year 2015. Subsequently, we expect that figure to rise to just over 20 trades per account through the end of our forecast period.

Ameritrade management mentioned that the number of trades on the brokerage’s mobile platform in the most recent quarter accounted for 14% of total trades — up from just 3% of total trades back in 2010. In fiscal Q1 2015, the number of daily trades through the mobile platform rose by 28% year over year to over 5.7 million trades. 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 and zero-brokerage apps that are targeting this particular market segment. [1]

Asset Base Sustains Growth

Ameritrade’s average client balances for the month of February were 4% higher than the year-ago period and 2% higher than December levels at $19.4 billion. [2] In the most recent quarter, the net yield on these assets rose, due to which revenues generated by interest on these balances grew by 26% year over year  to $161 million for the quarter. This was the fourth consecutive quarter of revenue growth of more than 25% in this division. The implied yield on these assets was over 40 basis points higher than the prior year quarter at 3.38%. We currently forecast the average yield for the current calendar year to be around 3.39% and resulting revenues to be 18% higher than the prior calendar year at about $725 million.

Ameritrade’s investment product fees, or the fees charged for its services on money market mutual funds and other funds, has also witnessed a robust growth over the last few quarters. The brokerage’s average fee-based asset balance for 2014 stood at $142 billion — nearly 18% higher than the average balance in 2013. The average balance further improved to over $155 billion through February. Investment product fee revenues have witnessed double-digit year-over-year  growth in eight successive quarters, with an average annual growth rate of over 20% in the same time period. 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.

Impact On Margins

According to our estimates, Ameritrade’s adjusted EBITDA margin in Q1’15 (ended December) improved by almost 50 basis points over the prior year quarter to 47.6%. The growth in net revenues was largely responsible for the margin improvement as most expenses remained flat. The only significant rise in the company’s operating expenses was in compensation and benefits costs, which rose by nearly 9% to $199 million during the quarter. Employee compensation and benefits expenses grew mainly on account of the company increasing its employee headcount to cater to the rise in trading volumes and investments. Similarly, the adjusted EBITDA margin for the full year expanded by almost 2 percentage points over 2013 to 47.2%. Going forward, the brokerage could continue to report healthier margins in the coming quarters, corresponding to net revenue growth.

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Notes:
  1. The iPhone app Robinhood lets you trade stocks for free, Bloomberg, March 2015 []
  2. Ameritrade Monthly Metrics, Ameritrade Investor Relations, March 2015 []