) is an online brokerage that allows individual investors to trade
equities, options and other securities. Ameritrade also offers
money market account services to clients through TD Bank USA. It
competes with other online brokerages and financial services firms
like E-Trade (
), Charles Schwab (
) and Bank of America (
Following results we
have updated our price estimate to $22.65
. The company's shares are currently trading at a discount of
almost 10% to our estimate. We believe that the biggest
contributing factor to the difference in prices is the outlook for
Ameritrade's earnings from money market deposit accounts.
Understanding Money Market Deposit Accounts
A money market deposit account (MMDA) is like a savings bank
account where clients deposit money and in earn a slightly higher
interest rate on it. Account holders can typically make a few
transactions a month that are free and are governed by a slightly
different set regulations and rules.
MMDAs became a source of revenue for Ameritrade in 2006
resulting from an agreement with TD Bank USA. This agreement was
inked as a part of Ameritrade's acquisition of TD Waterhouse in
January 2006. Prior to 2006, interest revenues for Ameritrade were
a significantly smaller part of the total revenues and included
interest earned on the cash and securities that clients deposit
with Ameritrade in order to trade online.
Contribution of MMDAs to Ameritrade's value
Ameritrade receives a fee from TD Bank for providing marketing,
record keeping and support services for their money market deposit
accounts. The fee is based on the yield earned on the client assets
less the actual interest paid to clients, a flat fee to the banks
of 25 basis points and the cost of FDIC insurance premiums. It is
also a high margin service as Ameritrade enjoys EBITDA margins as
high as 50% from MMDA services.
The net yield for Ameritrade from an MMDA was as high as 4% in
early 2008, before it fell to under 2% in 2009. We believe that the
interest rate will gradually increase over the years to reach the
highs it achieved in the pre-recessionary years. Moreover, the
increasing popularity of an MMDA over normal savings account among
clients due to the higher interest offered is also a significant
draw for Ameritrade.
In 2008-2010, Ameritrade migrated client cash held in client
credit balances and money market mutual funds into money market
account offerings. The total balance in these money market accounts
with Ameritrade almost doubled each year during this time period.
Going forward, we expect the balance in these accounts to
grow by at least 5% annually.
The estimated values of MMDA yields and client balances likely
contribute to as much 42% of Ameritrade's share. You can modify the
forecast above to see how they impact Ameritrade's price
You can see
the complete $22.65 Trefis price estimate for
Ameritrade's stock here.