NEW YORK (
have "few catalysts" to boost their stock prices right now, given a lack of imminent interest rate hikes combined with the seasonal summer slowdown of retail trading activity, according to one analyst.
With the market currently assuming that an interest rate hike by the end of the year is unlikely, using the interest-rate bet as reasons to own TD Ameritrade and Schwab is less compelling, Sanford Bernstein analyst Brad Hintz said in a research note to clients on Friday.
The two brokers are "solid companies" with "good management teams," but Hintz sees no near-term catalysts to provide earnings growth and multiple expansion, according to the note. Hintz maintained market perform ratings on both TD Ameritrade and Schwab. He does not cover
Fears of a global debt crisis in May have spoiled sentiment that a rise in rates, and consequently earnings, was imminent," Hintz writes. "With a spike in volatility in May, investors are hoping trading revenue will help offset this pressure. But we believe the impact of seasonality, even during crisis levels of volatility, could curb this opportunity."
Revenue growth at brokers like Schwab and TD Ameritrade is driven by retail investors returning to the equity markets, mutual fund activity, and new cash flows into brokerage accounts, but Hintz doesn't see activity picking up in any of those areas anytime soon.
In particular, the indicators that drive Schwab's revenue and expenses -- S&P performance, interest rates and DARTs (daily average revenue trades) -- "are all running below the 'bear case' assumptions year to date," Hintz writes.
"Absent a meaningful turnaround in the S&P or extreme levels of volatility and trading activity in the fall that will counter these other factors, we see few catalysts for revenue and earnings growth above the low end of management guidance," he writes.
Sandler O'Neill & Partners analyst Rich Repetto said earlier this month that the
, including E*Trade, saw a fleeting boost from the "flash crash" in May. TD Ameritrade's CEO Fred Tomczyk had said at a recent Sandler investor conference that volatility resulted in a record trading day for the online brokerage's customers.
However, retail trading volumes slowed later in the month, Repetto cautioned. He estimates that overall monthly trading volumes likely rose 5%, plus or minus 2.5%, for TD Ameritrade, Schwab, E*Trade and
Analysts on average, according to
, expect TD Ameritrade to earn 26 cents a share in the June-ending quarter; Schwab to earn a profit of 15 cents a share, and E*Trade to post a loss of 11 cents a share.
TD Ameritrade shares have pulled back nearly 15% from a 52-week-high of $21.30 reached in November. In midday action, the stock was down 1.2% o $18.02. Schwab shares have dropped about 19% from their 52-week-high of $19.95 in late April, and the stock up a penny to $16.13 in midday action.
E*Trade shares, which underwent a 1-for-10
last week, were ticking 6 cents higher to $13.84 in recent trades.
TD Ameritrade, Schwab and E*Trade will report their May monthly DARTS numbers next week.
--Written by Laurie Kulikowski in New York.