With record earnings, revenues and net new client assets in fiscal 2015, TD Ameritrade Holding Corporation AMTD appears a solid bet now. The company’s strong trading volumes, client focus and cross-selling opportunities are expected to yield positive results for the stock.
Further, the recent interest rate hike is expected to bring further stability to top-line generation, which creates a buying opportunity for long-term horses. Though lack of diversity is visible as TD Ameritrade’s operations are mainly concentrated in the U.S., sharper focus on organic growth is expected to make the growth path smoother for the company.
With net new client assets of about $63 billion as of Sep 30, 2015, TD Ameritrade’s strengths include strong top-line and earnings growth, trading activities and steady capital deployment actions.
Why is TD Ameritrade an Attractive Pick?
Benefit from Rate Hike: With a rise in rates, brokerage firms are likely to engage in more investment activity. As brokerage firms earn interest income on un-invested cash in customer accounts, the rate rise will allow the brokerage firms to invest at higher rates. As TD Ameritrade currently derives nearly 34% of its total asset-based revenues from net interest income, the company is set to benefit from the recent rate hike.
Strong Organic Growth: TD Ameritrade remains a leading asset gatherer with 7 consecutive years of double-digit asset growth since fiscal 2008 in net new client assets. Notably, during fiscal 2015, the company witnessed an annualized growth rate of 10% in net new client assets, within the long-term target of increasing net new client assets at an annual rate of 7% to 11%.
Additionally, the company’s net revenue recorded a 5% compounded annual growth rate (CAGR) over the last 6 years ending fiscal 2015. The company’s projected sales growth (F1/F0) of 6.18% as against the nil industry average indicates continued upward momentum in revenues.
Earnings per Share Strength: TD Ameritrade’s earnings per share have recorded a CAGR of 12% over the last fiscal four years (2012–2015). Earnings are expected to exhibit an upswing in the near term as the company’s projected EPS growth (F1/F0) is 9.15% compared to the industry average rate of 3.87%.
Strong Trading Activity: TD Ameritrade’s trading volumes have been graphing an uptrend. On a year-over-year basis, the company’s average client trades per day increased 4%, 14% and 8% in the fiscal years of 2013, 2014 and 2015, respectively, benefiting from the volatility in markets.
Strong Leverage: TD Ameritrade’s debt/equity ratio stands at 0.37 compared to the S&P 500 average of 0.65, indicating relative lower debt burden. It indicates the financial stability of the company even in an unstable economic environment.
Favorable Zacks Rank: TD Ameritrade currently carries a Zacks Rank #2 (Buy). The bullish rank is driven by upward earnings estimate revisions over the last 30 days. For 2015, the Zacks Consensus Estimate inched up 1% to $1.63 per share, while for 2016, it increased 2% to $2.03 per share.
Steady Capital Deployment: TD Ameritrade remains focused on managing capital levels efficiently. In October 2015, the company declared a 13% hike in its quarterly cash dividend. Notably, during fiscal 2015, the company returned 80% of net income (excluding amortization of intangible assets) through dividends and share repurchases and targets 60% to 80% for fiscal 2016. Such capital deployment activities are anticipated to boost investors’ confidence.
The Bottom Line
Organic growth, cross-sell opportunities, strong trading volumes and steady capital deployment activities continue to support TD Ameritrade’s growth prospects. Also, the recent interest rate hike and growing net new client assets are expected to serve as key strengths that will support earnings stability going forward.
Other Stocks to Consider
Some investment brokers worth considering are E*TRADE Financial Corporation ETFC, The Charles Schwab Corporation SCHW and KCG Holdings, Inc. KCG. All the three stocks carry the same Zacks Rank as TD Ameritrade.
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