Jeremy Thames Vanderbilt Investment Club Thaxston McKee, Dean Sisun, Brian Alter, Michael Hite,...

Jeremy Thames

Vanderbilt Investment Club

Thaxston McKee, Dean Sisun, Brian Alter, Michael Hite, Kalan Patel, Alex Roed, & Aimee Kawabata

“If only there was a business without the intricacies of a bank that could make money like a bank…”

- Someone not familiar with TD Ameritrade


• Ultra High Quality Business

• Efficient Asset Gatherer

• Massive Operating Leverage

• Relationship with TD Bank Gives Them NIM Upside Without the Capital Requirements of a Bank

• Advised Asset Business is Growing Very Quickly and Provides Earnings at Very High Margins

Investment Thesis


• Online Brokerage Platform

• Trading Stocks, Options, ETFs, Mutual Funds, etc.

• For Individuals and RIAs

• Advised Portfolios for Clients

• Cash Management through Sweep Services to TD Bank

• $653 Billion in Client Assets

What Ameritrade Does


• CEO – Fred Tomczyk, since 2008, came over from TD Bank, over half of comp in RSUs

• CFO – Bill Gerber, at AMTD since 1999, more than half of comp in RSUs

• Joe Ricketts – Ricketts family owns 11% of the company, Joe stepped down from board in 2011

Management Team


• Debt/EBITDA levels have been between 0.8 and 1.2 since pre-crisis

• Aggressive Buybacks since 2010• 18.9 million shares remaining under

authorization• Buybacks will remain a part of the

allocation strategy

Capital Allocation


• TD Bank owns 41% of Ameritrade• Stake has increased due to buybacks

• Ameritrade sweeps idle client cash to TD Bank

• TD Bank pays a fee based on the spread they can earn on that cash

• Ameritrade makes money like a bank but doesn’t have to hold capital against deposits

Relationship with TD Bank


• TD Bank pays Ameritrade an aggregate marketing fee based on the weighted average yield earned on the client insured deposit account balances, less the actual interest paid to clients

• Interest paid to clients is based on the nature and scope of the client’s relationship with Ameritrade

• Essentially, TD Bank pays Ameritrade to gather deposits for them



• TD Bank’s ownership was capped at 42%, now 45%

• New agreement gives AMTD flexibility to continue buying back stock

• TD Bank must liquidate ownership stake in excess of 45%

• Bottom line: the buybacks can continue!



• Client Trading• $9.99 per Trade• Deals for High Volume Traders

• 43% of 2014 Revenue

• Trading Activity is Best in Class• Market Leader in Trading Activity per Client

Account• Trades per Account is flat since 2009,

Competitors down

• Ameritrade has shown resistance to secular trend of less trading

Revenue: Commissions


• Best in Class Platform• Rated best online stock broker 3 years running• Even with higher per trade fees

• ThinkorSwim Platform for High Volume Traders• Lots of features that Traders seem to love

• “The broker charges $9.99 per trade a rate that can be up to two times more than some of the cheaper discount brokers but the value and quality delivered is so superior that is easily justifies the higher price tag. Our TD Ameritrade review shows they are the real deal.”

- StockBrokers.com

Attracting Traders


• Client Cash Management• Sweep Feature to TD Bank• Money Market Funds or Deposit Accounts• TD Bank pays AMTD based on Interest Spread

• Securities Lending and Margin Lending

• In Current Rate Environment, this segment is hugely Under-Earning

Revenue: Interest Margin



2000200120022003200420052006200720082009201020112012201320140.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Interest ROA & Fed Funds Rate

Interest Return on Assets Fed Funds Rate

• Advised Assets Growing faster than 20%

• Fees are Holding Stable at ~24 bps

• Secular Tailwind Towards Advised Portfolios

• ETF and Mutual Fund Trading Platform• Charge Funds to be Listed on their Platform• Tremendous Bargaining Power

• Ultra High Margin Business

Revenue: Product Fees


• TD Ameritrade is worth a multiple of its normalized earning power

• Normalized Trading Commissions are lower as a % of assets than today as the secular headwind continues

• Normalized Interest Margin is at the level it was in 2008 as a % of assets, implies about a 3% Fed Funds Rate

• Normal Product Fees assumes long run level of 35% of assets under advice

• Total Client Asset growth slows to long term rate of 7%

Valuation: Normalization


• Almost all fixed cost business

• > 400% Returns on Capital

• Upside of a bank without the mess

• Excellent management team that loves buying back stock

• Long Term Invested Assets grow at 7%, huge advantage for Ameritrade

Valuation: 12.5x EBITA


• Pricing Pressure in the Trading Commissions Space

• Very Competitive Industry, but Scale is Everything

• Dependence on Relationship with TD Bank

• ZIRP is Weird

Risks


Jeremy Thames Vanderbilt Investment Club Thaxston McKee, Dean Sisun, Brian Alter, Michael Hite,...

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