Ameritrade Earnings: More Risk Than Reward? - TheStreet

Ameritrade Earnings: More Risk Than Reward?

The company should report a big quarter, but good news is baked in and then some.
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Retail investors piled back into the market over the last three months, and no one felt the benefit of that more than

AmeriTrade

(AMTD) - Get Report

.

The Omaha-based discount broker is expected to report a huge jump in fiscal fourth-quarter earnings Tuesday, thanks to a sizable increase in trading activity. But don't expect that news to have a huge impact on the stock. AmeriTrade has already surged 89% since the end of June and is up 147% since the start of the year, as investors have anticipated strong results.

"I have a long-term outperform

rating on the stock, but it's probably due for a pause just because it has had such a run," said Richard Repetto, an analyst at Putnam Lovell Securities.

Shares of

E*Trade

(ET) - Get Report

fell almost 3% last Thursday despite the company's reporting a 47% jump in earnings and raising its estimates for the full year.

Analysts don't expect too many surprises when AmeriTrade reports quarterly results Tuesday morning. Just last month, the company said it expects earnings per share "to be in the middle to upper end of the 6 cents to 14 cents guidance given as of July 22, 2003." The broker earned just 4 cents a share in the same period last year.

"This is normally a slow seasonal quarter, but what we've seen is the summer months weren't as bad as anticipated and we saw a nice rebound in September," said Repetto who like most analysts is forecasting a 13-cent profit for the quarter.

AmeriTrade saw solid average daily volume of 161,000 trades in July and 137,000 trades in August. In early September, it said trading volume for the month was trending 30% above the August level. Average volume is expected to rise between 1% and 5% from the third quarter, according to some estimates.

"More retail investors are returning to the equity market as a result of recent market strength," said Friedman Billings Ramsey analyst Matthew Snowling. "This trend is evident in the fact that mutual fund flows have been strong for five straight months, margin borrowing levels are up, active accounts are increasing and trading activity is on the rise."

AmeriTrade said it opened 27,000 new accounts in August, lifting its total to more than 3 million. "If these levels persist into next year, we think our already-high estimate of 55 cents per share for 2004 could prove too conservative," said Snowling.

In its last update, AmeriTrade said it expects to earn between 27 cents and 53 cents in fiscal 2004, and the company will likely offer more details on Tuesday. Most analysts are calling for a profit of 51 cents next year, but Repetto said the firm might offer some cautious guidance. He noted that October volume has fallen "somewhere around 10%" because the market has recently flattened out.

"I think investors are going to need some indication that" retail traders will continue to participate in the market, he said.

Any disappointment could be very damaging to the stock, which is now trading at 44 times its 2003 earnings and 27 times next year's results. In comparison, E*Trade is sitting at just 19 times this year's earnings and 16 times next year's results.

Raymond James analyst Michael Vinciquerra is optimistic that the firm can record "significantly higher earnings" going forward, but he also believes the shares are "fully valued" and rates the stock a market perform.

Smith Barney analyst Robert Sobhani, who initiated coverage of AmeriTrade on Friday, agrees. While AmeriTrade is the best-positioned broker to take advantage of a recovery in retail trading, "the stock is largely reflecting our already aggressive assumptions," he said.

Aside from any commentary on the earnings outlook, investors will also be listening for anything the firm has to say about a possible acquisition of TD Waterhouse. Newspaper reports have said that TD Waterhouse's parent company has recently been in talks to merge the unit with one of its rivals.