TD Ameritrade (AMTD): Better Off On Its Own?

:With the furious round of speculation and talk of TD Ameritrade (AMTD) being sold, the issue of how the company is doing on its own seems to have been lost in the noise.

The company’s shares are actually in no better shape now, at $21, than they were during April 2006.

But, it is hard to argue with the company’s recent financial success. In the quarter ending March 31, AMTD had net revenue of $525 million, up from $497 million in the same quarter in the previous year. Operating income was $225 million, up from $203 million. The company’s purchase of TD Waterhouse in early 2006 appears to have gone well.

Total client trades per day were about 254,000, about flat with the same quarter in the previous year. Whether trading activity can be put at the company’s feet is hard to say, but it may be as much a by-product of general market activity as anything else.

Two hedge funds, SAC Capital and Jana partners, have picked up 8% of TD Ameritrade’s shares. They want the company sold to either E*Trade (ETFC) or Schwab (SCHW), presumably at a premium. But, with the shares up well over 15% in the last month, that may be a problem.

The two hedge funds may the assumption that putting AMTD together with another large discount broker will create cost savings and "economies of scale." In theory, that is right, But there is the matter of the overused but real concept of "execution risk". Selling one large discount broker to another only yields better results if the marriage works. That is hardly assured here.

SAC and Jana like the idea of an acquisition of AMTD, but, it is only an idea. For a purchaser, it is also a potential burden, a weight that may not be worth much of a premium.

Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.