Ameritrade Earnings Preview: What We’re Watching

Online brokerage firm Ameritrade (NYSE:AMTD), is expected to announce earnings for the fiscal first quarter of 2013, Tuesday, January 22. Tepid trading activity affected the company’s earnings through the last fiscal year ending September 2012 as transaction based revenues fell by 11%. Unlike its competitors, E*TRADE Financial (NASDAQ:ETFC) and Charles Schwab (NYSE:SCHW), which have diversified operations, Ameritrade is more reliant on trading activity as 40% of the company’s revenues are earned through commissions and transaction fees.

We believe that the Ameritrade stock is fairly valued at our $16 price estimate, which is 10% below the current market price.

See Our Full Analysis for : Ameritrade|Charles Schwab|E*TRADE Financial

Trading Activity Low

Ameritrade reported a 11% decline in total trades through the twelve months ending September 2012. A similar trend was observed by E*TRADE and Schwab. However, the industry has shown signs of a recovery, in September, Ameritrade’s daily average revenue trades (DARTs) increased 17% over August, with a 3 % increase in monthly volume in November. Charles Schwab recently announced that its daily average trades for December were up 11% from November, and also up 10% from the figure for December 2011. Ameritrade’s quarterly report will provide some insight on the future prospects for the online brokerage industry.

Mobile trading is an exciting prospect for Ameritrade. Trades executed via mobile applications accounted for 8% of Ameritrade’s daily average revenue trades (DARTs) in the September quarter, and it reported an average of 1,800 new users per day, an increase of 32% over the prior year. The company also reported an increase in option trades, which account for 30% of its total DARTs.

Opening New Accounts

Despite the drop in trading activity, Ameritrade has been successfully attracting brokerage clients and opened 190,000 new accounts in the September quarter, the most new accounts opened in a quarter since the first quarter of 2010. Although the number of trades per account has dropped over the last year, we believe that increased accounts will lead to higher activity as macro-economic conditions become more conducive for trading.

Consolidating Assets

Asset management fees from clients using Ameritrade’s money market account services to invest in mutual funds and its cash management services account for 40% of the company’s revenues. The company has been successful in attracting client assets, primarily by offering fee waivers. The average insured deposit account balance at the end of September increased by 22% over the last fiscal year, but the average yield fell from 1.55% in 2011 to 1.37% through 2012. We expect that the yield will remain low through the next few years as interest rates remain low, but an increase in client assets will help mitigate the effect of a dampened yield curve.

Submit a Post at Trefis Powered by Data and Interactive Charts | Understand What Drives a Stock at Trefis