The shares of this brokerage company were recently upgraded by Keefe Bruyette & Woods, to ‘Outperform’, and by Barclays to ‘Overweight’.
TD Ameritrade (AMTD)
From Cabot Stock of the Week
The past couple of months have been tricky for the market, with this week’s Facebook-inspired selling in the broad market the latest example of that. Even so, many signs (including the positive long-term trend and rare blastoff indicators that flashed in December and January) tell us the overall bull market remains intact, and one of our favorite “sectors” to play in a bull market is—Bull Market stocks!
Bull Market stocks are those whose business is directly tied to the stock market (or financial markets in general), including exchanges, money managers and brokers. When investor sentiment is poor, these stocks tend to struggle. But now, as money has been pouring into stocks and as trading activity picks up, many stocks in the group are acting well.
Moreover, there’s another tailwind that’s helping the group—higher short-term interest rates, which for some companies is dramatically boosting the interest income they earn on their customers’ cash holdings.
My favorite play in the group right now is TD Ameritrade (AMTD), which is taking advantage of the two trends above and has another catalyst that’s already boosting the bottom line.
The company, of course, is one of the big public brokerage houses, providing investing services, education and custodial services to more than 6,000 registered investment advisors. At year-end, the firm had a whopping $1.18 trillion of customer assets, 11.1 million customer accounts and, in Q4 alone, executed 726,000 client trades per day.
Things have been going the company’s way for a few quarters, but the big, game-changing event came last September, when Ameritrade finalized its takeover of Scottrade. The move added three million funded accounts, the largest physical branch network among online brokers (500 branches) and a strong trading core (137,000 trades per day). Ameritrade began onboarding Scottrade’s assets late last year, and management is very bullish on the results, expecting $450 million in cost savings by the end of next year that will boost earnings by 15% to 20%.
The combination of adding Scottrade’s business and the bull market in general goosed fourth-quarter results, with sales (up 46%) and earnings (up 53%) easily topping expectations. Looking at the details, commission revenue surged 24%, driven by a 49% bump in average daily trades (a price cut in early 2017 accounts for the discrepancy), while net interest income surged 85%, thanks to higher interest rates and a 25% gain in interest-rate sensitive assets. Bank account deposit fees were up a strong 55% and investment product fees rose 42%.
Thus, it’s clear that business is surging thanks to all these positive factors—the bull market, higher interest rates (another two or three Fed rate hikes appears to be a sure thing this year) and the new Scottrade assets and synergies. Throw in the corporate tax cut, which should be a boon for Ameritrade, and analysts see revenues up 42% this year while earnings explode 70% to around $3 per share. And the early expectation is for the bottom line to rise another 25% in 2019 as more Scottrade synergies kick in.
As for the stock itself, what’s really caught my eye is its action in recent weeks. You’d expect a Bull Market stock like AMTD to retreat and rest during the market’s wobbles of the past few weeks. But no! Instead, the stock found some giant-volume support in early February when the market was diving, and then decisively pushed to new highs two weeks ago before easing lower over the past few days with the major indexes.
Certainly, if the market moves lower from here, AMTD could as well. But the stock’s uptrend looks firm, and dips toward the 25-day line (near 58.5) or even the 50-day line (around 56.7) should offer support. BUY.
Timothy Lutts, Cabot Stock of the Week, cabotwealth.com, 978-745-5532, March 20, 2018