Thursday, January 26, 2006

FBR's Comment on TD Ameritrade

  
Friedman Billings Ramsey, Michael Parker & Matt J. Snowling, CFA, CPA, 27 January 2006

WE ARE DOWNGRADING TD Ameritrade to Market Perform from Outperform. We believe much of the near-term upside is now priced in the stock.

We are lowering our 12-month price target by $1 to $21, or 16 times our revised fiscal 2007 estimate.

[Ameritrade Holding closed the acquisition of Toronto Dominion's TD Waterhouse unit on Wednesday, forming TD Ameritrade.]

Along with the release of fiscal first-quarter operating results this morning, TD Ameritrade provided guidance for 2007 and details into the upcoming integration. While the company increased their revenue expectations, the high end of guidance came in below our expectations.

Ameritrade reported operating earnings of 22 cents per share for the quarter, in line with consensus and a penny shy of our estimate, excluding a one-time charge of one cent associated with Knight Capital Group forward contracts. Results included $18 million of nonrecurring charges related to the deal.

Management increased revenue synergies by $100 million to $300 million, yet the pick up is mainly attributable to the passive catalyst of favorable short-term rates. Management expects to realize the remaining $378 million of costs over the next 18 months, with much of that back-end weighted.

Ameritrade updated guidance for fiscal 2006 to earnings per share in the range from 82 cents to $1.00, and expects fiscal 2007 earnings in the range from $1.03 to $1.27.

To reflect the delay in synergy realization and further dilution of options from the special dividend, we are lowering our fiscal 2007 estimate by five cents to $1.30.

Additionally, while management tends to err on the conservative side, the company faces a challenging integration, possible pricing pressure on commissions, and fewer benefits from interest rates over the next several quarters.
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