Key Takeaways From Ameritrade’s Q4

In continuation with a strong performance in the first three quarters, TD Ameritrade (NASDAQ: AMTD) posted another impressive quarter to end fiscal 2018 on a high note. The company comfortably beat consensus estimates, with its revenue coming in at $1.4 billion, and its adjusted earnings per share coming in at 92 cents (vs. 39 cents in FY 2017 Q4). The robust performance was driven by better than expected results across core metrics, coupled with three interest rate hikes and the corporate tax cut. The company’s focus on client engagement and advisory services has helped it expand its customer and asset base, and consequently, quarterly revenues grew by over 42% year-over-year. Additionally, the acquisition of Scottrade has led to a significant increase in customers and assets. Further, its strategic investment in ErisX – a cryptocurrency exchange platform – strengthens its position in the Bitcoin spot and futures exchange market, and should further boost its trading segment in the near term. We believe continued momentum from the Fed’s rate hike should also drive near-term growth for Ameritrade.

Our price estimate for Ameritrade stands at $57, which is now significantly higher than the market price. We are in the process of updating our model based on the FY 2019 guidance provided. Below we discuss some of the key factors which impacted the brokerage’s earnings. With our interactive dashboard, you can modify the asset base and yield to see the change in revenue.

Rate Hikes Drove Growth In Interest Revenue  

Interest earning assets remain a key part of Ameritrade’s business, generating around 52% of the brokerage’s revenue in FY 2018. The multiple Fed rate hikes, coupled with the Scottrade acquisition, helped drive nearly 57% growth in the segment’s revenue through fiscal 2018. This trend is likely to continue, as we expect more planned hikes in the near term. Additionally, the net yield on these assets for the company, at 1.9%, remains lower than those of other players such as E-Trade (2.9%) and Charles Schwab (2.1%). We expect it to increase in the future driven by rate hikes. Consequently, we expect the interest earning assets to drive near-term growth, due to its high asset base and the moderate current yield on these assets in comparison to competitors.

Trading Revenues Grew Despite Cut In Commissions  

Transaction-based revenue accounts for 36% of Ameritrade’s overall revenue and grew by nearly 42% in fiscal 2018 despite the company’s decision to slash its commissions from $9.99 to $6.95 per trade in 2017. However, 59% growth in trading volumes managed to offset that impact and propel growth in trading commissions, which was largely driven by the Scottrade acquisition. Further, improvement in U.S. GDP, reduced trading commissions, increased volatility in the stock market, and the aforementioned relationship with ErisX should drive robust growth in trading volumes in the near future. This should more than offset the pressure on trading revenues.

Increased Demand For Tech-Enabled Products Helped Investment Product Fees

TD Ameritrade’s investment product fees saw nearly 32% growth in fiscal 2018, primarily due to an increase in the number of customers seeking financial advice supported by tech-driven insights. The company remains focused on addressing the demand for innovative financial products. With more customers seeking financial advice and services supported by technology, we expect a significant rise in the brokerage’s assets under management. The digital advisory business, and the company’s focus on newer investment products to meet customer demand, are likely to drive these asset volumes and higher investment product fees in the future.

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