Ameritrade: Hanging Tough

Analysts expect the broker to report higher March-quarter earnings, thanks partly to diversification away from trading

It was fitting that Ameritrade (AMTD) went public in March, 1997, right before the technology- and Internet-inspired stock market rally created one of the biggest bubbles in market history. Back then, Ameritrade was primarily a discount broker, catering to high-flying day traders. The end of that bull market wiped out many of Ameritrade’s best clients and the company’s stock price, which plunged by over 90% from its peak of $62.79 in April, 1999 before bottoming two years later.

Ameritrade is no longer the same dot-com era trading outfit. While still dependent on trading for around 40% of its earnings, Ameritrade has turned to acquisitions to branch out into other areas of the financial world. In 2006, it purchased TD Waterhouse, allowing it to offer enticing money market rates and boost its asset base. In May 2007, it acquired the Fiserv Investment Support Services Division, continuing TD Ameritrade’s expansion from a pure trading business to a more viable competitor with Charles Schwab (SCHW) and Fidelity.

But once again, like other brokers, Ameritrade is facing challenging market conditions. Ameritrade said trading volume in February rose 8% from the same month a year ago, but fell 18% from January 2008. On Apr. 15, competitor Schwab reported a 10% increase in trading volume for the March quarter. "It suggests the retail customers are hanging tough in a difficult market," said Friedman Billings Ramsey analyst Matt Snowling.

On Apr. 17, Ameritrade will reports results for its March quarter, giving investors a glimpse of how its diversification efforts are paying off. Analysts expect the company to earn $0.31 per share, an increase of nearly 35% over last year. Like last quarter, when TD Ameritrade reported earnings of $0.40 per share, beating estimates of $0.39, the company could beat by a penny or two.

But the proof of Ameritrade’s progress won’t necessarily be in the earnings, but in their breakdown. If the revenues from the non-trading business increase by a few percentage points, "that would be a positive," says UBS analyst Michael Carrier. "People would see that as gaining transaction."

Shareholders, however, have to wonder if it will be enough to knock TD Ameritrade’s shares out of their trading range, as they’ve been bouncing back and forth between $15 and $21 a share for the last two years. "To give them some credit, to be steady or stable in this environment is pretty good," Carrier said.

Looking ahead, current volatility in the markets won’t make it easy. Trading historically slows down in the second and third quarters. Many investors may choose to stay on the sidelines rather than risk their cash. Asset-based revenues from lending customer funds, and fees from money market accounts and other products, will be under some pressure if the markets continue their downward slide. Falling interest rates will also mean they make less money from lending activities.

But at least Ameritrade isn’t fully at the mercy of its trader’s whims. Wrote Goldman Sachs analyst William Tanona in a recent report: "Ameritrade is less dependent on trading activity today, which should help alleviate some pain should an economic slowdown negatively impact trading volumes."