Citi analyst Prashant Bhatia (the man who killed E*Trade) enthusiastically reiterates a Buy on TD Ameritrade (AMTD).
Bhatia notes that, historically, when AMTD has traded at its current level, it realises an average return of 135% in the next year (AMTD is trading at “11.9x forward 12-month earnings, or 30% below its historical average.”) Bhatia expects AMTD to focus on organic asset growth, which he thinks can be robust given AMTD’s recent success with its new client segmentation strategy:
We estimate that AMTD can achieve 7-10% organic client asset growth (vs 3% historically) and net new assets in 1H08 of $16b, are up 100%+ vs a year ago. We are seeing early signs of success from the new client segmentation strategy, adding sales people, revising comp plans to reward for asset gathering and retention, increased accountability to achieve asset gathering targets, and $100m+ invested in the sales, service & operations platforms.
Bhatia is also optimistic about the prospect of a dividend down the road, and is confident give the management team’s proven track record of return profits to shareholders:
We estimate AMTD will have $1b cash on hand by year-end and plenty of flexibility and we expect the firm to start paying a dividend down the road. This management team has an excellent track record of returning excess capital to shareholders, so a dividend may be coming 12-18 months out. Acquiring entities for scale or growth is also an option, although we don’t expect to see any acquisitions that would meaningfully change AMTD’s low risk profile.
Citi reiterates Buy and maintains $25 target.