One of the Foolish tenets for superior investment returns is "avoid a lot of active trading." It generates frictional costs, namely short- or long-term capital gains taxes (if done outside a tax-advantaged account) and commissions, all of which reduce returns. Besides, bruised fingertips from clicking the mouse too often while placing those orders can be a serious hazard.

But companies like discount brokerage TD AmeriTrade Holding (NASDAQ:AMTD) live on commissions. Some 52% of TD AmeriTrade's FY 2005 revenues (ended Sept. 30) came from commissions generated on roughly 150,000 trades per day. Another 40% came from interest, primarily margin interest and interest rate spread on cash held in clients' accounts. Revenue can be somewhat volatile, since there's less trading in years when the market noses down.

With the acquisition of TD Waterhouse's U.S. operations from Toronto-Dominion (NYSE:TD), reliance on commissions will decrease, because the company will be receiving income from fee-based investment platforms, as fellow Fool Nathan Slaughter pointed out. Commissions will still be a large part of revenue, though, since Ameritrade expects to handle almost 240,000 trades per day during FY 2007, though trades/commission activity is expected to represent only 40% of revenue by then.

Reliance upon uncertain commission revenue is evidenced in TD AmeriTrade's stock price, which has been under $20 for much of the past six years. Only recently did the price start to climb, primarily because of the rumors and subsequent announcement of the TD Waterhouse acquisition, pushing the stock up to roughly $26. The recent $6 drop was due to the payment of a special dividend to shareholders upon completion of the merger.

Going forward, it is difficult to project what this company might be worth. We have to use pro forma numbers for the combined company -- that is, the U.S. holdings from both Ameritrade and TD Waterhouse. For the 12 months ending December 2005, there was $1.823 billion in revenue with a 23.8% net margin, producing $434 million in net income. If one takes projected revenue of $2.126 billion for FY 2007 and applies the same net margin, one would expect FY 2007 income to be $502 million, for 8.7% compounded annual growth.

In contrast, management projects FY 2007 income to be $710 million -- a 32.5% compounded annual growth rate from December 2005 -- which takes into account synergistic savings that management hopes to realize. While the company may well achieve that, I'd rather play it safe and ignore those savings until they actually appear.

If I extend the 8.7% compounded annual rate out for five years, I get $658.6 million in earnings for FY 2010. Until it purchased the U.S. side of TD Waterhouse, Ameritrade had been reducing share count, so I will use the current shares outstanding, 603.6 million, and assume that this will remain constant (again, being conservative). This gives a projected EPS of $1.09. Using a P/E that reasonably captures recent activity, 26.9, the stock price would be about $29 in 2010, a 4.7% annual appreciation from the current $23.

However, if you apply analysts' average five-year earnings growth estimate of 12% to the same calculations, the stock price would be about $34 in 2010, for an 8% annual appreciation.

In my opinion, these results suggest that the stock is currently overvalued compared to the broader market, since an individual might get better results from investing in a broad market index. The PEG ratio of 1.5 -- based on a forward P/E of 18.3 and 12% expected growth -- supports this, at least by PEG standards (a PEG of 1 represents fair valuation). As I've mentioned, all these calculations are admittedly rough; a discounted cash flow analysis or something similar will likely yield a more informed opinion.

This whole scenario might not even happen. Declining market conditions might decrease trade volume and associated commissions beyond analysts' expectations; the recent merger could fail to deliver according to expectations; or a declining market might push earnings multiples downward. But if Ameritrade can accomplish savings and synergies that meet or exceed expectations, their margins, earnings, and stock price might similarly outperform the targets above.

Also note that the company is gaining something it has never had before: physical locations. The associated expenses could weigh on the company's returns if they fail to deliver according to its initial expectations. Finally, consider how other discount brokerages such as E*Trade (NYSE:ET) might react to the acquisition and the very nature of the brokerage business at this level. In this business, customer loyalty, or lack thereof, depends largely on price.

All in all, this is an interesting time for Ameritrade as it integrates the U.S. portion of TD Waterhouse. Foolish investors should keep an eagle eye on how the integration progresses.

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Fool contributor Jim Mueller is an Ameritrade customer, but he does not own shares in any company mentioned. The Motley Fool is investors writing for investors.