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Stock Analyst Update

Trading Volume to Partly Support TD Ameritrade Top Line

We don't anticipate making a material change to our fair value estimate and assess the shares as modestly undervalued.


Strong trading volumes will partially support narrow-moat TD Ameritrade's (AMTD) top line in 2020 as interest rate-related revenue declines. The company reported net income of $446 million, or $0.82 per diluted share, on $1.48 billion of net revenue for its fiscal second quarter ending in March. Net revenue increased 2% from the previous year and 15% sequentially. The sequential revenue increase was due to a $176 million, or 58%, increase in trading revenue, which more than offset a $37 million, or 5%, decline in interest rate-related revenue. We don't anticipate making a material change to our $46 fair value estimate for TD Ameritrade and assess the shares as modestly undervalued.

TD Ameritrade's management maintained its revenue guidance for the year, but increased its expense guidance. We believe the company's underlying assumptions are reasonable. After the move to $0-commissions on many types of trades in October 2019, trading volume has been on an uptrend. The company recorded 800,000 to 900,000 daily average trades before commissions were cut to zero, compared with 2.9 million daily average trades during March. That said, TD Ameritrade is assuming trades per day average 1.7 million for the remainder of the year, falling between the 1.5 million trades per day in January and 1.9 million trades per day seen during February.

We expect higher trading revenue will offset interest rate-related revenue headwinds in the near term. With the fed-funds rate being cut 150 basis points in March to a target range of 0% to 0.25%, and the 10-year U.S. treasury yield near 0.6%, interest rate-related revenue has been reset lower. Quarterly bank deposit account fees (which peaked at $454 million in the December quarter) were $444 million during the March quarter and may fall to about $395 million in the June quarter. While bank deposit account agreement balances increased $34 billion, or 28%, sequentially to $154 billion, it's not enough to offset the effect of lower interest rates.


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Michael Wong does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.