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Schwab’s Q1 Numbers Validate Pre-Earnings Bullishness on TD Ameritrade Holdings Corp. Stock

James Brumley

If you’re not sure what to expect this coming Monday when TD Ameritrade Holding Corp. (NASDAQ:AMTD) reports its Q1 earnings, you’re not alone. Current and would-be owners of AMTD stock have received mixed messages, including from the online broker itself.

How so? On the one hand, volatility is usually supposed to drive trading activity, and rising interest rates improve margins on cash deposits. On the other hand, the recent weakness since January’s peak has led to a simple — and unusual — disinterest in equities altogether.

With just a quick glance, it would seem like there’s a little too much risk to bother sticking with AMTD. But more than a few pros are singing the stock’s praises going into what could be a pivotal earnings report to simply ignore. Throw in the fact that Charles Schwab Corporation (NYSE:SCHW) just topped its Q1 estimates, and the bullish argument is bolstered.

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The Pros Aren’t Sweating the Lull

Victor Jones, Director of Trading for TD Ameritrade, recently noted, “Our clients for the past three months have been reducing their overall market exposure.” In a similar vein, TD Ameritrade’s Investor Movement Index has fallen for three consecutive months, but has fallen so sharply that it’s now at lows not seen since mid-2015.

While the sentiment index’s plunge doesn’t necessarily translate into waning commission-driving activity, by and large a disinterest in stocks does mean more traders are pushed to the sidelines where they’re less likely to make a commission-based trade. And, “reducing market exposure” more directly suggests a lull in trading action.

To that end, Interactive Brokers Group, Inc. (NASDAQ:IBKR) recently reported that its March DARTS (daily average revenue trades) fell 3.6%. It’s unlikely rivals didn’t feel the same headwind.

And yet, more than a few pros still prefer owning AMTD stock headed into its first quarter earnings report over not owning it, assuming investors are still fully engaged, even if they are net bearish.

Case in point: Credit Suisse says it’s long TD Ameritrade stock heading into the company’s earnings report. It also likes rival E*TRADE Financial Corp (NASDAQ:ETFC), suggesting ETFC stock is actually worth 25% more than its present value. William Blair analyst Chris Shutler is also a big fan of AMTD stock. Morgan Stanley and Bernstein also rate AMTD stock an outperform.

Two Key Drivers for TD Ameritrade

Too much consensus to think the optimism isn’t already fully baked in? It’s not an illegitimate concern, but in this case, the future AMTD stock news really is likely to be relatively bullish for a couple of different reasons.

One of them is the fact that less than 40% of TD Ameritrade’s revenue actually comes from trading. The remainder comes from fee-based sources like mutual funds and managed account services, which don’t necessarily require investors’ trading activity to be generated.

In fact, market volatility like we’ve seen since January can often push investors toward money managers and mutual funds, which are simpler and less stressful.

Simultaneously, rising interest rates help boost brokers’ bottom lines, perhaps even more so than higher interest rates help banks drive wider margins on their lending activity.


Michael Wong, Morningstar’s Director of Equity Research for Financial Services, explained late last month, “Even if the stock market were to fall and client assets were to also fall, the earnings of Charles Schwab and TD Ameritrade will likely still go up along with rising interest rates.”

The yield on 10-year Treasuries grew from 2.41% at the end of last year to 2.73% as of the end of the first quarter of this year. This is a pretty significant move by bond-yield standards that could create a noticeable improvement in financial companies’ margins.

Bottom Line for AMTD Stock

The 17% gain TD Ameritrade stock dished out since the end of last year can be intimidating, as is the trailing P/E of 34.4. Against a backdrop of a market pullback that at times became a little painful, it’s not exactly unsound to think traders simply walked away for a while during the first quarter.

That’s not quite how the psychology of an unexpected meltdown works, though. While investors may have been a bit shell-shocked after the 10% slide from the January high, most investors are still viewing the volatility as a buying opportunity.

A weak market tends to only crimp trading activity when it persists, and traders cultivate the idea that there’s no action to look forward to in the foreseeable future.

In the absence of that dynamic but with the backdrop of higher interest rates — not to mention Schwab’s recent earnings beat — AMTD stock may well be the buy most of the pros seem to say it is heading into its first quarter earnings report. The forward-looking P/E of 15.7 bolsters the bullish case.

E*Trade will report last quarter’s results on Thursday of this week. Interactive Brokers is expected to report its first quarter numbers after Tuesday’s close. Both reports will offer a glimpse of what to expect from TD Ameritrade.

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As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

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