Is TD Ameritrade Sending Mixed Signals?

With shares of TD Ameritrade Holding Corporation (NASDAQ:AMTD) trading at around $18.95, is AMTD an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

AMTD

The news released today has been digested as good. The stock is up almost 3 percent at the time of this writing. Q1 EPS was $0.27, which beat the estimate of $0.24. However, revenue was lower by 0.3 percent on a YoY basis, coming in at $651 million.

A big positive was a decline in operating expenses mostly due to lower employee compensation and a decrease in advertising expenses. There were many other positives as well. These positives included an 18.3 percent increase in total client assets, a 52.9 percent increase in new client assets, a 6.4 percent increase in net interest revenue, a 9.2 percent increase in average spread-based balance, and a 28.4 percent increase in average fee-based balance.

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While there were a lot of increases, there was still a decline in daily average revenue trades, which helped lead to a decrease in revenue. As far as EPS goes, it can always be manipulated. Revenue is more important. There was also a 1.58 percent decrease in net interest margin. All the increases above might be positives, but TD Ameritrade’s primary focus is to generate revenue through trading. It’s good to see that expenses have been cut, but it would better to see more organic growth. TD Ameritrade’s association with The Toronto-Dominion Bank (NYSE:TD) has the potential to help in that area.   

Let’s take a look at some important numbers so we can get a better idea of the big picture for TD Ameritrade.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio and balance sheet for TD Ameritrade are both strong. This company manages debt well. Operating cash flow is also respectable at $592.00 million.  

Debt-To-Equity

Cash

Long-Term Debt

AMTD

0.31

$5.10 Billion

$1.35 Billion

ETFC

1.66

$4.37 Billion

$3.83 Billion

SCHW

0.19

$33.56 Billion

$0

 

T = Technicals on the Stock Chart Are Solid

TD Ameritrade hasn’t seen enormous gains like many other stocks have seen over the past three years, but it has “outperformed” E*TRADE Financial Corporation (NASDAQ:ETFC) and The Charles Schwab Corporation (NYSE:SCHW) over a three-year time frame. TD Ameritrade also yields 2 percent whereas Charles Schwab yields 1.6 percent and E*TRADE offers no yield.

1 Month

Year-To-Date

1 Year

3 Year

AMTD

12.45%

12.85%

15.21%

9.01%

ETFC

17.61%

16.03%

7.51%

-36.68%

SCHW

9.74%

9.44%

24.94%

-12.34%

 

At $18.95, TD Ameritrade is currently trading above all its averages.     

50-Day SMA

16.68

100-Day SMA

16.48

200-Day SMA

16.83

 

E = Earnings Have Been Inconsistent

Earnings have been inconsistent since 2008. The same can be said for revenue. We haven’t seen much top-line growth over the past five years. This is a big reason why the stock hasn’t moved much. If you’re the type of investor who would enjoy the equivalent of running on a hamster wheel while receiving a few dividend payments that act as cheese to keep you interested, then this is the place to be.  

2008

2009

2010

2011

2012

Revenue ($)in billions

2.54

2.41

2.56

2.76

2.64

Diluted EPS ($)

1.33

1.11

1.00

1.10

1.33

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

703.80

653.39

673.14

667.26

647.20

Diluted EPS ($)

0.29

0.27

0.25

0.28

0.26

 

T = Trends Look Like They Support the Industry, But…

Trading platform companies actually have several avenues for generating revenue, but the most important is source of revenue is trading volume. There hasn’t been a sustained uptrend in this area since the financial crisis. Considering the broader market is nearing all-time highs, it doesn’t look like there is much upside potential. The good news is that companies like TD Ameritrade can come up with creative ways to show well they’re doing, which will assist stock performance.

Conclusion

Up until this point, it might seem as though I’m not a believer in TD Ameritrade, but that’s not the case. This is a company with good margins, decent cash flow, a very strong balance sheet, and a terrific brand name. At the same time, the economic environment doesn’t support significant and sustainable growth for TD Ameritrade at this time.

Based on all factors, many of which offset each other, TD Ameritrade is a WAIT AND SEE.

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