TD Ameritrade: Are Rate Hikes Worth The Wait At This Price?

| About: TD Ameritrade (AMTD)
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TD Ameritrade trades at all-time highs as expectations for more rate hikes are factored into the stock price.

The Q4 results were again held back by weak net interest revenues.

The stock valuation is now risky considering the expectation of multiple rate hikes that may not occur.

About a year ago, my investment thesis on TD Ameritrade (NASDAQ:AMTD) was that the stock was worth buying on the dips. The eventual interest rate hikes would lead the stock to higher prices and reward shareholders.

The stock has surged from those lows that eventually touched $25 and which now trade at $46. The equation is completely different this year with the market apparently already factoring in multiple rate hikes.

The main reason that rates matter is that the brokerage firm obtains more revenues from rate sensitive assets than transactions. As well, TD Ameritrade has seen these assets surge 14% over the last year.

The Q4 results showed the impact of the low rate environment, which existed the whole year. Q4 earnings were only up 5% to $0.41 while revenues hit a record despite only 6% growth.

All of the asset measures were up double-digits from 2015 levels, led by a 15% increase in client assets to $797 billion. Net interest revenue for the quarter was $151 million and actually down from last year.

The following slide shows that net interest revenue was the only revenue category that didn't grow over the last year. The lack of growth held back the overall growth rate.

Source: TD Ameritrade Q416 earnings release

The investment thesis is well established that TD Ameritrade will see a big boost from rate increases. Analysts have 2018 EPS estimates now reaching $2.05, up from $1.72 this year.

The P/E ratio is near the highs from the last few years suggesting some more upside in the stock, but likely not a lot.

AMTD PE Ratio (Forward 1y) Chart

AMTD P/E Ratio (Forward 1y) data by YCharts

The issue with chasing the stock above $50 is that the EPS growth is somewhat dependent on hitting the targeted rate hikes in 2017, which in the past few years haven't actually occurred. Any sign that rate hikes won't occur near the expected pace of three rate hikes in 2017 would send the stock back down to a level near the previous resistance ($37.50) and maybe even lower.

The key investor takeaway is that the investment equation in TD Ameritrade is completely altered this month. The stock is dangerous to buy, with rate hikes built into the price, as compared to the last few years when TD Ameritrade could be had without any assumptions of rate hikes.

The risk/reward doesn't favor piling into the stock now.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.