Ameritrade Says Its Stock Looks Undervalued

Updated from 11:25 a.m. EDT

Like competitor E*Trade ( ET), online broker Ameritrade ( AMTD) posted a sharp increase in earnings last quarter and raised the lower end of its guidance for the year.

On a conference call, the company also said that April is shaping up as a solid month so far, with average daily trades of around 200,000. But executives cautioned that trading could slow down over the summer months, as has been the case historically.

"The summertime is normally the slowest time," said Joe Moglia, chief executive at Ameritrade. "The summertime might result in lower activity rates."

Shares of the Omaha, Neb.-based firm fell 79 cents, 5%, to $14.29.

Rich Repetto, an analyst at Sandler O'Neill, said the company is being conservative. "They have no better inside knowledge of where trading is going than anybody else, and if you look back to last July, it was one of the best months of the year," he said.

Chief Financial Officer Randy MacDonald said during the call that Ameritrade is undervalued at current levels. He noted that the stock trades at just 18.9 times forward earnings, even though analysts are calling for annual earnings growth of 15% over the next five years.

In contrast, the S&P 500 is projected to grow earnings by 10.7% per year over the next five years and trades at 17.8 times forward earnings, he said.

"Analysts estimate Ameritrade's earnings per share will be 40% higher than the S&P 500 companies, however Ameritrade only trades at a 6% premium," he said.

Still, Moglia noted that the firm would not buy large blocks of stock from venture capitalists who have been slowly reducing their stake in the company since Ameritrade merged with Datek.

"With the geopolitical risk that exists in the world today and as we enter the summertime -- normally the summertime is a little slower -- I think for us to be able to buy some stock almost every day and be more aggressive at lower points in the market is the best thing for Ameritrade shareholders," he said.

The company is still eligible to purchase up to 10 million shares of Ameritrade's stock under a previously announced buyback program.

Ameritrade posted net income of $81 million, or 19 cents a share, in its fiscal second quarter, compared with $9.6 million, or 2 cents a share, in the same period last year.

Analysts surveyed by Thomson First Call had expected the firm to earn 18 cents. Net revenue rose 67% to $247 million.

Colin Clark, an analyst at Merrill Lynch, said investors were disappointed with the firm's results Tuesday because sales were more than $5 million below expectations and the firm benefited from a lower effective tax rate of 35%, which added 1 cent to earnings per share. He also noted that bottom line results were boosted by a one-time reduction in clearing and execution costs-- which amounted to $2 million?and by share repurchases worth $3.3 million.

"Going forward, we believe top-line growth could be harder to come by now that the retail recovery is well underway," he said in a research note.

The brokerage said it processed an average of 212,000 trades per day in the quarter, and commission revenue per trading day was $2.5 million, compared with $1.9 million per day in the prior year's quarter.

Margin balances rose $1.1 billion, to $3.8 billion. Qualified accounts, or accounts with a liquidation value of $2,000 or more and which produce 90% of the firm's revenue, rose to 1.7 million, from 1.2 million at the end of September.

Ameritrade now expects to earn between 59 cents and 79 cents a share in fiscal 2004, up from a prior forecast of between 56 cents and 79 cents a share. On average, analysts expect the company to earn 73 cents this fiscal year.

On the call, Moglia said while institutional trading probably fell off somewhat as tax season approached, retail trading has been "pretty steady." All the major brokers have benefited from a surge in retail trading over the past year, as the financial markets have shown signs of life.

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