Jeremy Thames
Vanderbilt Investment Club
Thaxston McKee, Dean Sisun, Brian Alter, Michael Hite,
Kalan Patel, Alex Roed, & Aimee Kawabata
“If only there was a business without the intricacies of a bank that
could make money like a bank…”
- Someone not familiar with TD Ameritrade
Vanderbilt Investment Club
Investment Thesis
• Ultra High Quality Business
• Efficient Asset Gatherer
• Massive Operating Leverage
• Relationship with TD Bank Gives Them NIM Upside
Without the Capital Requirements of a Bank
• Advised Asset Business is Growing Very Quickly and
Provides Earnings at Very High Margins
Vanderbilt Investment Club
What Ameritrade Does
• Online Brokerage Platform
• Trading Stocks, Options, ETFs, Mutual Funds, etc.
• For Individuals and RIAs
• Advised Portfolios for Clients
• Cash Management through Sweep Services to
TD Bank
• $653 Billion in Client Assets
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Management Team
• CEO – Fred Tomczyk, since 2008, came over
from TD Bank, over half of comp in RSUs
• CFO – Bill Gerber, at AMTD since 1999, more
than half of comp in RSUs
• Joe Ricketts – Ricketts family owns 11% of the
company, Joe stepped down from board in 2011
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Capital Allocation
• Debt/EBITDA levels have been between 0.8 and
1.2 since pre-crisis
• Aggressive Buybacks since 2010
• 18.9 million shares remaining under authorization
• Buybacks will remain a part of the allocation
strategy
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Relationship with TD Bank
• TD Bank owns 41% of Ameritrade
• Stake has increased due to buybacks
• Ameritrade sweeps idle client cash to TD Bank
•
TD Bank pays a fee based on the spread they can earn
on that cash
• Ameritrade makes money like a bank but
doesn’t have to hold capital against deposits
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Relationship with TD Bank
• TD Bank pays Ameritrade an aggregate marketing
fee based on the weighted average yield earned on
the client insured deposit account balances, less
the actual interest paid to clients
• Interest paid to clients is based on the nature and
scope of the client’s relationship with Ameritrade
• Essentially, TD Bank pays Ameritrade to gather
deposits for them
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Relationship with TD Bank
• TD Bank’s ownership was capped at 42%, now
45%
• New agreement gives AMTD flexibility to
continue buying back stock
• TD Bank must liquidate ownership stake in
excess of 45%
• Bottom line: the buybacks can continue!
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Revenue: Commissions
• Client Trading
• $9.99 per Trade
• Deals for High Volume Traders
• 43% of 2014 Revenue
• Trading Activity is Best in Class
• Market Leader in Trading Activity per Client Account
• Trades per Account is flat since 2009, Competitors down
• Ameritrade has shown resistance to secular
trend of less trading
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Attracting Traders
• Best in Class Platform
• Rated best online stock broker 3 years running
• Even with higher per trade fees
• ThinkorSwim Platform for High Volume Traders
• Lots of features that Traders seem to love
•
“The broker charges $9.99 per trade a rate that can be up to two
times more than some of the cheaper discount brokers but the
value and quality delivered is so superior that is easily justifies
the higher price tag. Our TD Ameritrade review shows they are
the real deal.”
- StockBrokers.com
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Revenue: Interest Margin
• Client Cash Management
• Sweep Feature to TD Bank
• Money Market Funds or Deposit Accounts
• TD Bank pays AMTD based on Interest Spread
• Securities Lending and Margin Lending
• In Current Rate Environment, this segment is
hugely Under-Earning
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Interest ROA & Fed Funds Rate
0.6%
7.0%
6.0%
0.5%
5.0%
0.4%
4.0%
0.3%
3.0%
0.2%
2.0%
0.1%
1.0%
0.0%
0.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Interest Return on Assets
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Fed Funds Rate
Revenue: Product Fees
• Advised Assets Growing faster than 20%
• Fees are Holding Stable at ~24 bps
• Secular Tailwind Towards Advised Portfolios
• ETF and Mutual Fund Trading Platform
• Charge Funds to be Listed on their Platform
• Tremendous Bargaining Power
• Ultra High Margin Business
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Valuation: Normalization
• TD Ameritrade is worth a multiple of its normalized
earning power
• Normalized Trading Commissions are lower as a % of
assets than today as the secular headwind continues
• Normalized Interest Margin is at the level it was in 2008
as a % of assets, implies about a 3% Fed Funds Rate
• Normal Product Fees assumes long run level of 35% of
assets under advice
• Total Client Asset growth slows to long term rate of 7%
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Valuation: 12.5x EBITA
• Almost all fixed cost business
• > 400% Returns on Capital
• Upside of a bank without the mess
• Excellent management team that loves buying
back stock
• Long Term Invested Assets grow at 7%, huge
advantage for Ameritrade
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Risks
• Pricing Pressure in the Trading Commissions
Space
• Very Competitive Industry, but Scale is
Everything
• Dependence on Relationship with TD Bank
• ZIRP is Weird
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