However, it wasn’t all TD Ameritrade in the three months ended June 30. Charles Schwab excelled in net new assets, where it added $15.4 billion in client funds for an annualized increase of 10%, which is 200 basis points higher than TD Ameritrade’s increase. In addition, its fee- and spread-based revenues experienced higher growth in the quarter, while its trading revenues experienced a slower decline.
Where TD Ameritrade gets a huge advantage is employee compensation. Charles Schwab’s compensation and benefits in the quarter came to $430 million, or 36% of its revenue, while TD Ameritrade’s compensation was $169 million, or 25% of revenue. It’s possible Charles Schwab is a much better place to work. It’s equally possible that TD Ameritrade saves a bundle being based in Omaha as opposed to San Francisco. Unless Charles Schwab moves to Omaha, I doubt it can close the gap in operating margins. All things being equal, Charles Schwab can outsell TD Ameritrade until the cows come home, and it still won’t be more profitable.
Citigroup analyst William Katz upgraded TD Ameritrade in mid-September from “hold” to “buy,” suggesting its stock price is so low that the possibility of interest rates rising — which previously had been factored into the stock price — is no longer the case. Furthermore, Citi believes that TD Ameritrade will buy E-Trade Financial despite CEO Fred Tomczyk indicating it wasn’t interested in the assets and TD Bank, its largest shareholder, probably wouldn’t be either.
Nonetheless, Katz sees the potential deal providing an 18% to 26% increase in its earnings, which translates to about a $3 gain on its stock price. Regardless of whether the deal happens, TD Ameritrade’s current price-to-earnings ratio is 25% lower than Charles Schwab’s. There’s no doubt about it: AMTD is the cheaper stock right now.
Charles Schwab is going into the franchise business. Its future expansion is through the recruiting of independent registered investment advisors to open new branches across the country. It hopes to have 80 operating by 2013. Think of this as the Edward Jones approach, only giving away ownership of the offices through franchising.
TD Ameritrade, on the other hand, will grow its business by adding 100 salespersons annually, placing them in existing branches. Where it sees opportunities to open new offices, it will, but sparingly. Frankly, this is a more sensible approach to gathering assets. So much can go wrong in the franchise model, including quality control, that I have to wonder if the $50,000 franchise fee Charles Schwab receives is worth it. I already think TD Ameritrade’s stock is the better buy. The franchise idea only confirms it.
As of this writing, Will Ashworth did not own a position in any of the aforementioned stocks.