Can Your Broker Do This?

Taking Charles Schwab's (Nasdaq: SCHW  ) baton and running with it, TD AMERITRADE (Nasdaq: AMTD  ) is also posting healthy quarterly results this morning.

The discount broker kicked off fiscal 2008 in fine fashion, with first-quarter profits soaring 67% higher to $0.40 per share. Net revenues inched 20% higher to $641.6 million. The performance lapped the market's expectations on the top and bottom lines.

With $300 billion in client assets under its watch, the growing discounter made the most of a turbulent quarter where investors smelled both fear and opportunity. This doesn't mean that the typical TD AMERITRADE customer is a frenetic trader with the stability of a tornado. The average account is on pace to complete just 12.6 trades this fiscal year (higher than the pace of 9.5 trades at this point last year). Accountholders will be happy to know that they are paying slightly less, with the average commission and transaction fee dropping from $13.04 to $12.84 per trade.

Shareholders obviously don't need to worry about that customer-friendly move. TD AMERITRADE is clearly making it up in volume. Giving customers a better deal and still bumping up pre-tax profit margins to 56%? That's a win-win, my friends.

It won't be until next week's quarterly report out of E*Trade (Nasdaq: ETFC  ) that we will know whether a lot of the growth at Schwab and TD AMERITRADE is coming at the expense of their struggling rival, though the pickup in trading activity actually bodes well for E*Trade's retail brokerage business. It's encouraging enough for me to go out on a limb and predict that E*Trade's quarterly report -- next week, after Thursday's market close -- will propel shares of E*Trade higher the next day. If anything, it will be a sigh of relief.

The discount brokerage industry has certainly delivered over the past year. At this point last year, investors must have been nervous, with banks like Wells Fargo (NYSE: WFC  ) and Bank of America (NYSE: BAC  ) offering commission-free trading on their largest accounts. Even the opportunistic Zecco came down hard on E*Trade's misfortunes, stepping up the marketing efforts of its commission-free trading website.

So where does TD AMERITRADE go from here? Coming off a record quarter, the broker is raising its near-term outlook. For the fiscal year ending in September, TD AMERITRADE is now looking to earn between $1.23 a share and $1.41 a share. That prices the shares at an attractive earnings multiple in the mid-teens, though guidance is never a safe bet in this industry.

Revisions happen on a quarterly basis, as accountholders either clam up or feed into the market's trigger-finger urges. So raise a glass to TD AMERITRADE; three months from now you'll either be bringing that goblet down or raising it even higher.


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