At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best …
TD Ameritrade (Nasdaq: AMTD ) shareholders unwrapped their Christmas gift a few days early this week, and what to their wondering eyes did appear? An upgrade from fellow Keefe Bruyette Woods -- and a 3% pop in price for a stocking stuffer.
Taking the other side of a trade outlined by megabanker Goldman Sachs earlier in the month, Keefe argued that while it's true Ameritrade could suffer from a continuing low interest rate environment (… and from a "housing slump" … and from "volatile equity markets" … and from … "retail investors mov[ing] to the sidelines in a prolonged downturn"), the opposite is also true. If our economy continues to improve, and the Fed jacks up interest rates, TD Ameritrade should be able to profit from, for example, lending margin interest to its trader-clients at higher rates. (And of course, if an improving economy encourages customers to invest more, and trade more, then this would be good for commission revenue as well.)
Goldman apparently thinks all this happy talk is a pipedream -- and to be perfectly frank, Keefe's list of reservations suggests it’s not 100% certain that everything's hunky-dory, either. Nevertheless, after noticing how "the recent sell off in [TD Ameritrade] shares has brought the shares back to an attractive valuation level," Keefe thinks the benefits outweigh the risks on this one. Are they right?
Let’s go to the tape
Whether we should buy into Keefe's optimism today depends a lot on how well the banker has done on similar prognostications in the past. Unfortunately, Keefe's record here is mixed. On the one hand, it's performed pretty well, picking Commercial Banks along the lines of TD Ameritrade parent Toronto-Dominion Bank (NYSE: TD ) :
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Companies
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Keefe Says
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CAPS Says
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Keefe's Picks Beating (Lagging) S&P by
|
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Fifth Third Bancorp (Nasdaq: FITB )
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Outperform
|
**
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117 points (two picks)
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|
SunTrust Banks (NYSE: STI )
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Outperform
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**
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113 points (three picks)
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US Bancorp (NYSE: USB )
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Outperform
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****
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(1 point)
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On the other hand, though, Keefe hasn't acquitted itself quite as well on its Capital Markets picks:
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Companies
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Keefe Says
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CAPS Says
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Keefe's Picks Beating (Lagging) S&P by
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Goldman Sachs (NYSE: GS )
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Outperform
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***
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(19 points) (two picks)
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|
Morgan Stanley (NYSE: MS )
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Outperform
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**
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(26 points) (two picks)
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State Street
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Outperform
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**
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5 points
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And when you get right down to it, it almost seems like Keefe is guessing in both banking categories. While it's profited mightily from its bullish calls on Fifth Third and SunTrust, and not been hurt too badly by either USB or State Street, the fact remains that the banker's scoring just 51% for accuracy on Commercial Banking picks, and 48% for Capital Markets -- so it's essentially a coin flip on either side.
Flip a coin, any coin
All of which, I fear, puts investors right back where we started -- wondering what to do with TD Ameritrade. For what it’s worth, here's how I would approach the problem: Right now, TD Ameritrade is selling for about an $11 billion market cap. Its trailing earnings come to $644 million, and free cash flow backs up about 80% of these reported "profits." Thus, the company sells for about a 17 times multiple to GAAP earnings, and 21 times free cash flow.
Stacked up against consensus expectations for 14% 5-year profits growth, neither number looks particularly excessive to me … but neither do 17x earnings and 21 times free cash flow represent a discount to the firm's intrinsic value. When I combine these valuations with Keefe's multiple reservations about how Ameritrade would perform in a weakening economy, I simply see no margin of safety in the shares today.
Foolish takeaway
Goldman has good reason to fret over TD Ameritrade's valuation. Stay away.
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