Monday, March 03, 2014

Investing in Investment Brokerage Earnings Growth

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After a small hiccup, markets are again back on track with the S&P 500 now posting a modest gain for the first two months of the year. This quick rebound, coupled with the impressive stock market performance last year, is slowly beginning to draw more retail investors back to equities.

This is especially the case as the 30 year bond bull market ends, producing losses in bond portfolios for the first time in memory. These losses in bond funds and the strong stock market are the catalyst for more retail interest in the space, which is undoubtedly great news for the online brokerage community which caters to this group.

Companies in this space are seeing asset levels soar and trading orders rise too. This is greatly helping their bottom lines, and it is making an investment in the brokerages an intriguing idea, particularly if the current trends in the market continue. While there are a number of companies that focus on this market, one excellent option is TD Ameritrade (AMTD - Trend Report).

AMTD in Focus

TD Ameritrade is an Omaha based online broker, allowing retail investors to purchase and sell a variety of securities including stocks, preferred stock, mutual funds, ETFs, and options, just to name a few. The firm has grown into a giant in the space, as it now has close to six million funded customer accounts with client assets approaching half a trillion dollars.

As you might expect, TD Ameritrade makes a sizable amount of its revenues from commissions, and with more interest in the market, the total amount of trades are soaring. However, AMTD actually makes just over half of its revenues from items like interest revenue and insured deposit account fees, and with investors piling capital into their online accounts, these revenues look likely to increase too.

Thanks to this trend, AMTD has had an easy time in beating estimates at earnings season, beating by about 6% on average over the last four quarters. And with these trends likely to continue in the space, analysts have been raising their earnings estimates as of late, suggesting that the picture is definitely improving for AMTD.

Earnings Estimates

In the past two months, earnings estimates have been moving universally higher for AMTD. Not a single estimate in our consensus has gone lower in the time frame, including 11 estimates moving higher for the current year earnings, and eight moving higher for next year’s earnings forecast.

These revised estimates have pushed the current year consensus up from earnings of $1.34/share 60 days ago, to $1.41/share today. Thanks to these moves, AMTD is now projected to have year-over-year earnings growth of 15% for the current year, and just under 20% growth for next year, meaning that the there is still plenty left in AMTD’s growth story, and that if anything, it is only going to get better with time.

Bottom Line

Due to these factors, it is shouldn’t be too surprising to note that AMTD has a Zacks Rank #1 (Strong Buy) and that we are looking for outperformance from this company in the weeks and months ahead.

And while the broad investment broker industry is highly ranked too, AMTD clearly stands out thanks to its growth trajectory, brand name, and rising estimates, suggesting this firm is the crème of the crop in this important market segment.

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