The trade trade is still alive and kicking. Ameritrade (NASDAQ:AMTD) posted second-quarter earnings of $0.19 a share yesterday, many times last year's $0.02 a share. Revenues surged 67% as qualified accounts climbed from 1.2 million to 1.7 million during the first six months of its fiscal year.
With folks flocking back to the market -- and doing so through discount and deep discount brokers -- the only thing better than being an investor these days is being an investor in the discount brokers. Ameritrade and E*Trade (NYSE:ET) have nearly tripled over the past year. Charles Schwab (NYSE:SCH) and TD Waterhouse parent Toronto Dominion (NYSE:TD) haven't kept pace, but they too are fetching higher prices.
I had the chance to speak to Ameritrade CEO Joe Moglia yesterday. Here are his thoughts on his company and the sector's future.
Q: You reported a quarter that would be considered stellar by most measures, yet the stock fell back on the news. What are your thoughts as to what the market is thinking right now?
A: I can't tell you exactly what the market is thinking. I'm looking at it, frankly, as a pretty good buying opportunity. This is our fourth record quarter in a row. Over the past two quarters, we have earned more than we did in 2003 and that was a record year. So, I can't be too concerned over what happened over a few hours of trading as long as we continue to deliver good returns to our investors.
Q: In the 1990s, it seemed as if it was easy to be a discount broker. As long as you had the marketing budget to get noticed, it was an easy sell to a hungry audience. How is the landscape different today?
A: I think the client is a little better educated, especially after the market debacle from 2000 to early 2003. Self-directed individuals know what they want. For the value they get from a place like Ameritrade, it's pretty significant. The client gets an awful lot for $10.99.
Q: Some may argue that it's fruitless to compete solely on price. What has Ameritrade done to differentiate itself from its competitors?
A: We agree with that. We get back to this great value proposition. We do the best job of educating our clients. For instance, we believe that exchange-traded funds offer substantial benefits over mutual funds. Yet, we conducted a survey and found that only a little more than 1% of our customers thought that ETFs were a great long-term investment. That's why we created an ETF center to educate investors on the benefits and potential strategies with ETF investments. We also have risk management tools for the active traders and are in the process of opening our brand new website with better tools and services.
Q: Visibility is never easy when your business depends on the everchanging whims of the market. So, it's no surprise to see a wide range of projected earnings -- from $0.59 to $0.79 a share -- for this fiscal year. Yet, momentum kicking in one way or another can quickly make even those numbers obsolete. What factors are you basing your current projections on?
A: We try to provide a sensitivity analysis for the investing community. We can't necessarily predict that the market will be good, obviously. Our numbers are based on 170,000 trades a day at the low-end of the range for the current quarter. That would produce about $0.14 a share in earnings. 238,000 trades a day would be higher end, or $0.23 a share. Summer is seasonally slower, so we have 136,000 at the low end of the range -- or a dime a share.
Q: Sector consolidation has been in fashion over the last few years. Do you see that continuing or is it time to lie back and enjoy the digestion process?
A: I think that there is still potentially more consolidation in the trade. Discount brokers have gone from numbering in the hundreds to just 110 over the past few years. I think that number will continue to go down. The market has recovered over the past year, so that will probably slow down the pace of consolidation, but it should continue.
Q: Where do you see the full-service brokerage industry in five years?
A: I think it's very clear that the full-service brokers are making a major play on wealth management. They will handle the multi-million dollar clients on a personal basis. There's a lot of money there, but it's also a very small segment of the population.
Is finding a new broker easy or does it require some due diligence? Have you checked our Broker Comparison Table lately? Who is the best discount broker for you? All this and more -- in the Discount Brokers discussion board. Only on Fool.com.
Longtime Fool contributor Rick Munarriz has been proudly investing through online discount brokers since 1991. He likes the industry but does not own shares in any companies mentioned in this story.
