There were two good reasons to be optimistic heading into this morning's TD AMERITRADE
-
Charles Schwab
(NASDAQ:SCHW) came through with better-than-expected results last week. -
E*Trade
(NYSE:ETFC) followed with healthy growth on the retail brokerage side, despite a hit from its mortgage business.
Well, it was worth the wait. One-third of the country's discount brokerage bellwethers that reported saw profits soar 65% higher to hit $0.33 a share. Analysts were perched at the $0.31-a-share profit mark.
Chunkier margins helped widen an 18% top-line boost into explosive profitability. The summer's trading volatility certainly helped stir up trades. The company set a record with 505,000 trades in a single day. However, it's important to note that just 39% of the company's net revenues came from commissions and transaction fees. Like its peers, discount brokerage players are leaning more on steadier asset-based revenues to bring home the bacon.
TD AMERITRADE is initiating its profit guidance for fiscal 2008, expecting earnings to come in between $1.15 to $1.39 a share over the next four quarters. Wall Street is smack dab in the middle of that with its $1.28-per-share target.
The case for buying into the discount brokerage space is easy to make. A bearish market turn may dry up trading in the near term, but the companies have done well in diversifying into more complete financial institutions. The threat of zero-commission trading offers from big banks like Bank of America
In short, the discounters are tested and well-positioned, but which one should you buy? It's a tricky call if you go simply by forward profit multiples.
2008 EPS (est.) |
2008 P/E |
|
---|---|---|
E*Trade |
$1.30 |
8.4 |
TD AMERITRADE |
$1.28 |
14.9 |
Charles Schwab |
$1.15 |
19.2 |
The value hound answer may be E*Trade, but investors may want to wait until the last of the subprime demons is exorcised. Over the past three months alone, analysts have talked down E*Trade's 2008 earnings outlook from $1.90 to $1.30 a share. We may not have hit bottom just yet.
TD AMERITRADE and Schwab have held up nicely in that time. So does that make TD AMERITRADE the better buy? It could be, but don't base that on valuations alone. Schwab is granted a valuation premium as the market leader. Still, given the sector's bright prospects and TD AMERITRADE's attractive valuation, it's hard to bet against the company.
Yes, this morning's report was indeed worth the wait.