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Will Higher Costs Hurt TD Ameritrade (AMTD) Q1 Earnings?

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TD Ameritrade Holding Corporation (AMTD - Free Report) is scheduled to report its first-quarter fiscal 2017 results on Jan 18, before the opening bell.

Omaha-based investment broker’s fourth-quarter fiscal 2016 (ending September) earnings lagged the Zacks Consensus Estimate and were below the prior-year quarter figure. Results were affected by lower revenues and higher expenses. Further, the company experienced a decline in average client trades per day.

Notably, TD Ameritrade had delivered positive earnings surprises in two of the prior four quarters, with an average beat of 0.77%.

Regarding the stock’s performance, shares of the company gained 61% over the past one year, outperforming 50.3% growth for the Zacks categorized Investment Bank.

Will the upcoming earnings release give a boost to TD Ameritrade’s stock? This depends largely on whether the firm is able to post a beat in the first quarter. However, our quantitative model doesn’t conclusively point to an earnings beat this time. Here’s why.

TD Ameritrade doesn’t have the right combination of the two key ingredients – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) – for increasing its chances of an earnings beat. Note that we caution investors against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

Zacks ESP:The Earnings ESP for TD Ameritrade is 0.00%. This is because both the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at 41 cents. This is a major indicator of a likely positive earnings surprise for the company. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: TD Ameritrade’s Zacks Rank #1 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings beat.

Factors to Influence Q1 Results

Expenses to trend high: Expenses are likely to remain under pressure given the company’s ongoing investments in technology and advice and guidance offerings.  Further, compliance with Department of Labor's (DOL) fiduciary rule will flare up costs further.

Margin pressure lingers: A lingering low interest rate environment has been weighing on TD Ameritrade’s net interest margin (NIM). Though spread-based revenue has increased in recent quarters, TD Ameritrade has been experiencing a shrinking NIM. Further, rise in the 10-year Treasury yield since Nov 8, 2016, is anticipated to alleviate pressure on net interest margin (NIM) to some extent. However, the favorable influence on NIM is not likely to occur in the quarter.

Market volatility: Being an investment bank, TD Ameritrade is exposed to extreme market volatility. Therefore, the company is likely to be hurt by the persistent market swings being experienced since the beginning of 2016.

Continued asset growth: The company has been witnessing double-digit asset growth for the last several years. Notably, during fiscal 2016, the company recorded an annualized growth rate of 9% in net new client assets, within the long-term target of increasing net new client assets on an annual rate of 7–11%. With an innovative trading platform, consistent focus on high net-worth clients and enhanced service model to boost engagement and retention; we anticipate TD Ameritrade to exhibit the improving trend in the fiscal first quarter as well.

However, activities of TD Ameritrade during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained unchanged at 41 cents over the last 7 days. Notably, the estimated figure represents year-over-year growth of 5.4%.

Stocks That Warrant a Look

Here are some other stocks you may want to consider, as according to our model, these have the right combination of elements to post an earnings beat this quarter.

KeyCorp (KEY - Free Report) has an earnings ESP of +6.90% and a Zacks Rank #2. It is scheduled to report fourth-quarter results on Jan 19. You can see the complete list of today’s Zacks #1 Rank stocks here.

The earnings ESP for Citigroup Inc. (C - Free Report) is +1.79% and it carries a Zacks Rank #2. The company is expected to release fourth-quarter results on Jan 18.

Fifth Third Bancorp (FITB - Free Report) has an earnings ESP of +2.33% and a Zacks Rank #1. It is slated to report fourth-quarter results on Jan 24.

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