TD Ameritrade upgraded to 'outperform'

Despite some regulatory headwinds, its strong financial position and solid cash flow should give it flexibility in returning capital to shareholders and investing in future growth.

By Zacks.com Sep 3, 2013 10:44AM

Arrow Up (© moodboard/Corbis)By Zacks Equity Research


We upgraded our recommendation on TD Ameritrade Holding Corporation (AMTD) to "outperform" from "neutral" on Aug 29, 2013, based on its strong asset gathering capabilities that led to growth in market fee-based revenues. The company's impressive fiscal third-quarter earnings also stimulated the upgrade.


Why 'outperform?'

TD Ameritrade remains a leading asset gatherer with four consecutive years of double-digit annualized growth since 2008 in net new client assets. An increase in funded accounts and expansion in the RIA servicing business were the primary factors behind growth in organic assets.


With a strong financial position and solid cash flow, TD Ameritrade enjoys flexibility in returning capital to shareholders and investing in future growth. We expect such deployment activities to continue enhancing investors' confidence in the stock.


Moreover, TD Ameritrade's association with TD Bank provides an opportunity for both firms to cross-sell products. Even though TD Ameritrade operates mainly as an online broker, the collaboration with TD Bank allows it to have a physical presence in the bank branches.


For TD Ameritrade, the Zacks Consensus Estimate for both 2013 and 2014 remains unchanged at $1.19 and $1.31 per share, respectively, over the last 30 days.


However, regulatory issues pose a headwind to the company. The Dodd Frank Act and the limitations imposed by regulations of the Federal Reserve System and Financial Industry Regulatory Authority are expected to increase the cost of compliance for the company. Laws and regulations related to the Internet and safeguarding practices can negatively impact its business as well. Additionally, the sluggish macroeconomic environment will likely limit trading activity and weigh on TD Ameritrade's financials.


Other stocks to consider

TD Ameritrade currently carries a Zacks Rank #1 (Strong Buy). Other financial stocks worth consideration include GAIN Capital Holdings (GCAP), Banner Corporation (BANR) and Preferred Bank (PFBC). All these carry the same Zacks Rank as TD Ameritrade.



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