Shares of Ameritrade Currently Trading at a Discount

The Stock Masters submit: Concerns over a prolonged drop in U.S. stocks have sent TD Ameritrade's (AMTD) stock price down 30% since January of 2006. It's currently right in the middle of its 52 week range, at 17.40.

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On August 10th, TD Ameritrade announced that daily average revenue trades rose to 210,000 in July from 209,000 in June. That may not sound like much, but it's an extra 30,000 trades, which is definitely not a decline.

So why invest your money in a company you use to invest your money? Because of a little something called interest income. Last quarter, AMTD profits jumped 67%, as revenue soared by 130% to $540 million. Part of this boom is tied to interest income. Let me explain:

As a brokerage firm's client base grows (in TD Ameritrade's case, thanks to the TD Waterhouse acquisition) the brokerage firm can make a substantial profit from lending money, especially via margin. AMTD's net interest revenue rose 102% last quarter.

Another reason I'm feeling particularly bullish about AMTD is big insider trading activity. Insider Score reports: The chairman of TD Ameritrade (AMTD) has made the largest purchase by any insider, at any company, in the past two years. Founder and Chairman J. Joe Ricketts bought approximately 7.3M shares at an average price of $15.59 on July 20th/21st, paying out more than $113.8M for the stock, and upping his holdings in the company to more than 120.55M shares, or about a 19.76% stake. Ricketts' last open market transaction came in November 2003, when he sold 2.7M shares at $12.38.

With a P/E of 17.94, TD Ameritrade has a discounted valuation compared to both E*Trade (ET) at 18.26 and Charles Schwab (SCHW) at 24.24. All three of these companies have big growth potential, but AMTD has the most attractive price right now of the three. My plan is to buy AMTD now and hold until the share price gets back to the 22.50-25.00 range, which I believe it will, if not much higher.

Personally, I prefer using Tradeking to place my trades - I've never had any problems and I love the $4.95 stock and $.65 option trade fees.

Article written by Phil McCallister.

Comments

[M Mansinh]

In the short term Ameritrade is making more money by lending and giving a measly interest to it's brokerage clients (almost 30-50% less than Fidelity & Schwab for Money Market), but if this continues, they will start loosing customers.

This is probably why they trade at a cheaper multiple than Schwab & eTrade?