TD Ameritrade's Grim Growth Outlook: An E*Trade Merger May Be Necessary

 |  Includes: AMTD, ETFC
by: Jim Johnson

I’ve always wondered why the market gives TD Ameritrade (NASDAQ:AMTD) a low P/E multiple, and this is one of those cases where I think Wall Street is dead right. The CEO Joe Moglia has done a great job moving Ameritrade away from a dependence on commissions. I’ve been an Ameritrade customer since the Web Street Securities acquisition years ago, and I can tell you that the customer service has always been great. Part of the reason for this is due to Moglia’s recognition years ago that trying to compete on commissions alone is a losing battle. Despite what I see as a successful merger with TD, the essential problem here is that Moglia is having to deal with forces beyond his control.

Retail investors are getting tired of the not-so-fair tactics going on in the stock market. In addition to that, they came home from work one day and found out the Dow Jones almost dropped to 12,000. They knew that stocks were risky, but the ones who decided to cut their losses and buy lower must have been quite disappointed to find out two months later the Dow Jones would be at 13,000. All of this, whether right or wrong, is leading to a retail market full of investors just waiting to find a new hobby.

In addition to a not-so-enthusiastic customer base, the retail brokerages are facing a new breed of brokerage competition, the Interactive Brokers [IB] and Trade Stations of the world. These brokerages have been around for a while, but they continuously threaten one of the retail brokerages’ most profitable operations: the active traders.

Not only will Ameritrade continue to face competition from the Interactive Brokers, but so will Ameritrade’s stock. The the Interactive Brokers IPO auction should be completed this week, and I was quite disappointed to learn that my bid for $23/share will probably not get accepted because the expected price range was moved from $23 - $27 to $27 -$31 after an increase in the number of shares in the offering. I don't know what the price will come in at, but Ameritrade and E*Trade (NASDAQ:ETFC) investors may be tempted to convert to a stock with higher growth potential. Let’s not even discuss the 200 pound gorilla that no one is talking about: the continuing rise of Single Stock Futures.

I was not surprised to learn that the rumor mill was recently cranking out tales of a merger between E*Trade and TD Ameritrade. It seems like a good idea to raise profit margins at first, but a closer look reveals it may be a merger of necessity. Maybe Wall Street would even bless the hypothetical deal with a P/E of 20. I have no idea whether the rumor has any credibility, but it would fix my only two criticisms of TD Ameritrade: lack of access to foreign markets and the ability to buy CD’s and bonds online. I'm sure the MBA's will have plenty of duplicate operations to reduce too. T D Ameritrade is always going to appeal to a specific market segment, but the growth outlook just isn’t there. Hence, I love you Ameritrade, but I would love you a lot more as an E*Trade/Ameritrade team.

Disclosure: none