While TD Ameritrade (AMTD) has expanded its focus to cater to "mass affluent" investors, 46% of business still comes from trading - a higher percentage than rivals E*Trade (ETFC) or Schwab (SCHW) - and earnings are set to get a boost as retail investors pour back into the stock market.
"When these cycles change ... it's really like a tide coming in," says Bernstein's Brad Hintz, who recently upgraded the stock. "With fixed costs already covered, margins pop. And the cycle lasts years, not months."
Rising interest rates could also give the whole industry a boost, and Ameritrade - holding $96B in rate-sensitive assets for clients - could see EPS climb $0.36 in the first year after a 100 basis points rise in rates (fiscal 14 EPS is expected to be $1.44).
Among the roadblocks is the boosted scrutiny over HFT following the release of the Michael Lewis book. Ameritrade doesn't disclose how much revenue it gets from payment for order flow, but analysts peg it about a mid-single digit percentage of revenue and mid-teens percentage of profits. Ameritrade argues the practice helps lower trading costs and improves execution fees, and analysts say the practice is unlikely to be completely eliminated. AMTD's stock is off about 12% since the book came out, about the same as E*Trade, but less than Schwab.