What To Expect From Ameritrade’s Q1

TD Ameritrade (NASDAQ: AMTD) had solid fiscal 2018. The company’s revenue grew by just under 50%, while its bottom line improved by nearly 58% for the fiscal year ended September. The robust growth was largely due to the Scottrade acquisition, in addition to better-than-anticipated results across core metrics, coupled with three interest rate hikes and the corporate tax cut. Interest earning assets, which generate about 50% of the company’s revenues, grew nearly 7% in October and November, and we expect this trend to continue when the company reports its fiscal first-quarter earnings on January 23. We expect over 15% growth in revenues for this segment in 2019, and believe that the fiscal first quarter growth will be along similar lines.

Our price estimate for Ameritrade’s stock stands at $59, which is nearly 15% above the market price. We have also created an interactive dashboard which outlines what to expect from AMTD’s FY2019 Q1 results. You can modify the key value drivers to see how they impact the company’s revenues and bottom line. Below we discuss some of the key factors that are likely to impact the brokerage’s earnings.

Factors Driving Near Term Growth

Interest earning assets remain a vital part of Ameritrade’s business, generating over 50% of the brokerage’s revenue in FY 2018. The multiple Fed rate hikes, coupled with the Scottrade acquisition, drove 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. In addition, the net yield on these assets for the company, at 1.9%, remains relatively lower compared to peers like E-Trade (2.9%) and Charles Schwab (2.1%). We expect it to increase in the future driven by further rate hikes. As a result, 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.

In the wake of increased competition from discount and traditional brokerages, Ameritrade decided to cut its commissions per trade by nearly 30% to just under $7. Despite this, solid growth in trading volumes (+59% y-o-y) in FY 2018 more than offset this impact and propelled growth in trading commissions, largely driven by the Scottrade acquisition. Further, improvement in U.S. GDP, reduced trading commissions, increased volatility in the stock market, and its strategic investment in ErisX – a cryptocurrency exchange platform – should not only establish a solid position in the crypto market, but also further boost its trading segment. These factors should continue to offset the negative impact of the reduced commission rate.