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TD Ameritrade – Waiting for Higher Market Volatility or Interest Rates

Fiscal third quarter results were recently reported by TD Ameritrade, which were in line with estimates. Growing 5% year-to-year, revenue came in above consensus at $763 million. Representing the third best quarter in their history, in what is usually a light quarter, net new assets were $13.4 billion. The September quarter is on pace for a new record.
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Operating expenses were higher than anticipated, but operating margins grew 40 basis points year-to-year, to 41.4%. In line with consensus, EPS was $0.34, while fiscal 2014 estimates have been lowered by $0.02, to $1.38. Fiscal 2015 estimates are unchanged at $1.53, showing a 7% growth. Excluding amortization of intangibles, shares trade at 20 times the 2015 estimate, while the dividend yield is 1.5%. Belief is that TD Ameritrade could announce another special dividend in October.

Based on EPS upside potential, strong positioning, management execution and capital allocation flexibility, the Outperform rating is reinforced. Equity market volatility showed low levels, but management stated retail logins were flat quarter-to-quarter and the investor movement index remains positive. Again, clients were net buyers of stocks in the quarter.

With mobile trades representing 13% of DARTs in the quarter and mobile daily logins up 45% year-to-year, mobile platforms are helping. From June to July, the pace of trading has quickened, with DARTs at 396,000 (6% increase month-to-month). As a percentage of client assets, cash recently dropped to 14.2%, which is below TD Ameritrade’s normal 15-20% range. Higher DARTs and cash balances, as well as lower net buying activity by retail investors, are expected once higher market volatility returns. This should result in IDA balance and revenue growth, meaning TD Ameritrade is under-earning compared with a more “normal” market environment.

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