A new report from BMO Capital Markets published Tuesday, July 1st, suggests that the discount broker sector is coming under pressure due to lagging retail trading, and slightly lowers earnings estimates across the board in its coverage universe.
BMO analysts David J. Chiaverini and Richard Fellinger currently rate the U.S. diversified financials sector as Market Perform.
Discount broker sector affected by slowdown in retail trading
The analysts point out that daily average revenue trades (DARTs) at the discount brokers were flat to slightly up m/m but flat y/y in June based on their channel checks with private brokers.
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The BMO report also highlights that DARTs in CY2Q14 finished somewhat below their previous estimates. Chiaverini and Fellinger are modeling DARTs at discount brokers to drop 19% q/q (-1% y/y) on average, another decline from -14% q/q previously.
Moreover, the BMO analysts also decided to trim their quarterly EPS estimates for the sector ahead of earnings following a careful review of quarterly market data.
Low market volatility
Volatility also continues to decline. Of note, overall equity market volatility remained at historic low levels through June. The VIX average was 11.5 in June compared to 12.5 the prior month, and an average of 14.0 over the past 12 months.
Discount Broker outlook: Charles Schwab
The BMO analysts rate TD Ameritrade Holding Corp. (NYSE:AMTD) as Market Perform owing to its relatively high valuation. That said they continue to like the firm’s business model given strong double-digit asset gathering and low balance sheet risk given its relationship with TD Bank, which owns about 42% of the company. Chiaverini and Fellinger also point out that TD Ameritrade has produced the consistent asset growth rates among the major discount brokers over the last few years. They also highlight the firm’s ongoing revenue diversification efforts: “The company’s somewhat newer focus on advice-based asset gathering (including Amerivest and AdvisorDirect) should produce robust revenue growth in this “third revenue” stream. In our view, the company remains the leader among the large self-directed firms for client equity and options trading.”
E TRADE Financial
The analysts rate E TRADE Financial Corporation (NASDAQ:ETFC) as Market Perform given its current valuation appropriately reflects anticipated interest rate increases. Furthermore, they point out that the company’s late start in building an asset-based fee income stream likely constrains multiple expansion relative to peers. “We believe E*Trade has a good retail brokerage business and a solid brand, but near-term upside is limited, in our opinion, owing to valuation.”