With shares on the rise, TD Ameritrade gets Goldman upgrade

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Posted: Saturday, July 27, 2013 12:00 am

TD Ameritrade has received a stock-market upgrade from Goldman Sachs, the move coming after shares rose 66 percent while the Omaha-based brokerage languished on the investment bank's “sell” list for more than a year.

Alexander Blostein, a stock analyst for New York-based Goldman, wrote in a research report this week that he upgraded TD Ameritrade to “neutral” from “sell” on expectations of stronger earnings from interest rates that are expected to rise, generating more income from the company's investment of the undeployed cash in customer accounts.

“We believe TD Ameritrade is likely to see an acceleration in earnings per-share growth over the next several years, as rate-sensitive revenues are starting to trough, asset-gathering momentum remains robust, and expenses are well controlled,” Blostein wrote in a note to investors.

The bullish sentiment from Goldman comes after TD Ameritrade shares have risen about 85 percent in the past year, and about 64 percent so far this year, good for the No. 7 slot in the Dow Jones U.S. Financial Index.

Shares of the employer of 2,000 people in Omaha were selling at about $16 when Goldman downgraded TD Ameritrade to “sell” in July 2012. They are trading for about $27.25 now, 25 cents above the new 12-month target price Blosten set in his upgrade, an upward revision from the earlier target of $19.

The shares are little changed since Tuesday, when the company said fiscal third-quarter profit rose 19 percent, to $184 million, on $120 million of net interest revenue.

A big part of the bullish thesis on TD Ameritrade in recent months stems from its ability, as an online stockbroker, to invest large sums of otherwise-undeployed cash that resides in customer accounts. The way it is done, said Rich Repetto, online brokerages analyst for New York investment bank Sandler O'Neill, gives TD Ameritrade a big competitive advantage over other online brokers.

TD Ameritrade has an agreement with its largest shareholder, TD Bank, to transfer certain customer cash deposits to the bank's balance sheet. The bank, part of Canada's Toronto-Dominion Bank, then pays TD Ameritrade the yield earned from investing the deposits, minus fees for doing the work.

In recent years, Repetto said, the net yield that TD Ameritrade receives from TD Bank has declined due to the near-zero interest rates at which banks are investing their deposits. Should interest rates return to 2007 levels of around 4.5 percent, the company would be in for a “meaningful” revenue increase, Repetto said.

This TD Bank agreement, Repetto said, also frees TD Ameritrade from having to amass the capital reserves required of banks if it attempted to replicate the arrangement internally.

“The stock has had a great run,” said Repetto, who has a “buy” rating and a $30 12-month price target on TD Ameritrade. “There might be some trading challenges over the summer, but given interest rates and the possibility of them going up, there is still upside.”

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