Secular Shifts In Wall Street

Returning to a previous post, in the rare instance I decide to openly speak of my interest in specific companies, please revisit TD Ameritrade - Recession Proof?

Part of the reason I believe this company to be a long term winner is because of a secular shift in attitude towards Wall Street and their commission based models. The shift is away from Wall Street, embracing the fee only, or fee based advisor, who discount brokers offer custodial services to.

Now my original claim was a bit too bold, no business is recession proof, but the point I am making is that TD Ameritrade is in an excellent position to weather the storm and emerge in great form. Consider their most recent metrics from the last quarter and months:

(click for larger image)

I circled some areas of importance, they are as follows:

Net New Assets: $7.8 bln
New Accounts: 217 k
Total Accounts: 7,052 k
Client Assets: 233 bln

That first metric is of most importance. In the face of economic peril and a secular bear market, TD Ameritrade managed to gatherimpressive net new assets in the December quarter, organically. This supports my theory of a secular shift from traditional wirehouses to the investment advisor custodial platform. It was there in plain sight for anyone to see who cared. New accounts and total accounts are also up quite markedly year over year, which suggests not only excellent asset gathering, but also good retention.

Now the issue of client assets, which are down 22% year over year. That actually isn't bad, it's better than the major index performance and suggests retail investors are quite successful on their own. However, it impacts the current revenues of TD Ameritrade negatively while the balances are down.

Spread based assets are suffering as well. This includes revenues dependant on interest rates. While rates are low, revenues suffer. Interest rates are historically low.

What this all adds up to is a great long term strategic vision. The performance in the short run, as expected in a deflationary recession/depression, is going to be very sluggish. Consider their most recent press release:

NEW YORK (Reuters) - TD Ameritrade Holding Corp (NasdaqGS:AMTD - News) said on Tuesday quarterly earnings dropped 23 percent, in line with expectations, and the online broker lowered its 2009 earnings forecast because of a dark economic outlook.

...

The company logged $7.8 billion in net new assets in the quarter, nearly triple what it attracted in the previous quarter.

Still, interest rates near zero have hampered Ameritrade's ability to earn profits from assets. The company now expects to earn between 90 cents and $1.15 per share this year, down from the $1.10 to $1.42 per share it forecast three months ago.

...

BENEFITING FROM TURMOIL

There are already signs that consolidation among big broker-dealers, such as Morgan Stanley (NYSE:MS - News) and Citigroup (NYSE:C - News), will drive business to discount brokers, which offer custodial services for investment advisers.

"It's a good quarter with strong net new asset growth," said Richard Repetto, an analyst at Sandler O'Neill. "They look to be benefiting from the turmoil at the large investment banks."

Tomczyk said Ameritrade will continue to "take advantage of the current dislocation in the market," but warned there could be a "lull" in the stream of advisers considering moving to Ameritrade.

The drop in new advisors will most likely work out to be true over the next year or two. Also, as I expect markets to still drop considerably and interest rates to remain low for quite some time, let's assume the worst.

Let's assume EPS drops to a low of $0.75 by the end of 2009, that's much worse than estimates. At 10x's earnings we're looking at $7.50 per share. This seems a probable scenario as the earnings outlook is grim over the next two years based on the info provided. I would actually be bold to say this estimate could be used as a possible floor on EPS.

Matthew W. Scullen is an investment advisor representative for Liberty Analytics, LLC, a registered investment advisor. Matthew does have positions in TD Ameritrade common stock for client portfolios he manages. Please consult an investment professional before considering a position in TD Ameritrade. In no way is Matthew advocating that the stock of TD Ameritrade is an appropriate investment for any one individual.