TD Ameritrade: Trade Volumes Fall Through May, New Strategy To Focus On Upmarket Investors

TD Ameritrade (NYSE:AMTD) revealed its plans for 2016 to attract more high net worth clients on its trading platforms this week. The company will take initiatives to offer better personalized services and investment consultants to individuals with $1 million or more in their accounts. ^[1] The discount brokerage firm has added over a million net new brokerage accounts in the last five years on the back of competitive pricing on brokerage fees and trading commissions while keeping its minimum account balance requirements at reasonable levels. Ameritrade’s management claims that the company’s plans to offer improved services and personalized attention t0 upscale customers in no way reflects that it is abandoning smaller investors or refraining from offering them the expected services.

The company recently reported a slowdown in trade volumes for May after witnessing a surge in volumes since the beginning of the year. On the other hand, the total client assets continued to improve. Below we take a look at some of Ameritrade’s key metrics and our full-year forecasts for these metrics.

We have a $34 price estimate for Ameritrade’s stock, which is over 10% lower than the current market price. Ameritrade’s stock price has risen by 7-8% since the beginning of the year.

See our full analysis for TD Ameritrade

Trading Activity Sequentially Lower In May

After a sustained period of high trading activity, especially in January and February, volumes have seemingly subsided in the June quarter. The company averaged 476,000 trades per day through the March quarter, which fell to about 457,000 trades per day in April. This has further declined to about 427,000 trades per day in May. Despite a sequential decline, volumes were about 11% higher than the comparable year-ago period.

The total number of funded accounts at the brokerage stood at 6.46 million at the end of March. This was a 5% year-over-year increase. ^[2] Ameritrade realized about $12.04 per trade during the most recent quarter, which was 4% lower than the average implied revenue per trade in 2014. Resulting revenues generated via trading commissions in the quarter were about 6% lower than the year-ago quarter at $350 million. We currently forecast Ameritrade’s average revenue per trade through 2015 to be about 2% lower on a y-o-y basis at $12.35 for the full calendar year.

Asset Base Sustains Growth

Ameritrade’s average client balances were 8% higher than the year-ago period at $20.4 billion during the month of May. ^[2] In the most recent quarter, the net yield on these assets fell by about 20 basis points over the prior year period to 3.07%. However, high average balances meant that net revenues were up by about 2% y-o-y to $149 million. We currently forecast the average yield for the current calendar year to be around 3.40% and the average balance to be about 8% higher than the prior calendar year at about $20.5 billion.

Ameritrade’s average insured deposit accounts (IDA) balances stood at $74.7 billion through May, which was about 3% higher than May last year. The company witnessed a modest 1% y-o-y rise in revenues to $205 million from IDA balances in the March quarter. We currently forecast Ameritrade’s IDA balances to increase by 4-5% for the full year. However, Ameritrade’s management expects yields to remain flattish for the full year owing to the current interest rate scenario. If rates pick up significantly in late-2015, then it could push yields higher than our current forecasts.

Investment product fees, or the fees charged for its services on money market mutual funds and other funds, have been a fast-growing revenue stream for Ameritrade. 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 has further improved to almost $162 billion through May.  Investment product fee revenues have witnessed double-digit year-over-year growth in nine successive quarters. 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 fiscal Q2 (quarter ended March) compressed by almost 3 percentage points over the prior year quarter to 42.5%. Limited revenue growth complemented by a rise in operating expenses led margins to fall through the quarter. Although most cash operating expenses remained flat over the comparable prior year period, the brokerage incurred about 8% higher employee compensation and clearing costs. We remain optimistic about the company wide margins for the current calendar year. We forecast Ameritrade’s adjusted EBITDA margin to improve by over a percentage point through the calendar year to over 48% for 2015.

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1. TD Ameritrade moves upmarket to millionaires, Reuters, June 2015 [↩]
2. Ameritrade Monthly Metrics, Ameritrade Investor Relations, June 2015 [↩] [↩]