Ameritrade’s MMDAs Add Significant Value to Stock
Ameritrade (NYSE:AMTD) provides one of the most popular platforms for individual investors to trade equities, options and other securities. As the company grows its customer base with more and more investors using the Ameritrade platform, we believe that the company’s biggest source of income will continue to be the interest it earns on its money market deposit accounts (MMDAs). The company offers money market account services to clients through TD Bank USA. Ameritrade competes with E-Trade (NASDAQ:ETFC), Charles Schwab (NYSE:SCHW), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC) online services.
Our price estimate for Ameritrade stock is $22.71, implying a premium to market price.
Ameritrade-managed MMDAs have grown a lot in recent years
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Money market deposit accounts are similar to savings bank accounts, whereby clients can deposit money and earn interest. They can also make withdrawals as required without much notice, based on certain rules and regulations.
Money market deposit account fees became a new revenue category for Ameritrade only in 2006, resulting from a money market deposit account agreement with TD Bank USA. The agreement became effective upon the closing of Ameritrade’s TD Waterhouse acquisition on January 24, 2006.
Since then, Ameritrade’s client money market balances have been increasingly rapidly since 2006, growing from $9.3 billion in 2006 to $42.2 billion in 2010.
… and we expect them to grow by at least 5% annually in the years to come
One of the main factors for rapid growth in Ameritrade’s client money market balances has been the company’s strategy to migrate client cash held in client credit balances or swept to money market mutual funds into the insured deposit account (or, money market account) offering. We expect this strategy to cease because of the completion of most of the migration by the end of 2010, which will temper the growth rate over the years to come.
At the same time, the recovery in global markets will encourage clients to keep their liquid cash in money market accounts rather than conventional savings accounts because of higher yields. Therefore, as client deposits increase along with rising markets, Ameritrade’s MMDA balance should rise.