Ahead of second quarter results from North American brokers, Morgan Stanley analyst Michael Cyprys downgraded TD Ameritrade (AMTD) to Equal Weight and told investors that he prefers Charles Schwab (SCHW), which he sees best positioned for an upside surprise. Taking an opposite stance, his peer at Deutsche Bank initiated a short-term "Catalyst Call" pair trade idea of long TD Ameritrade against being short Charles Schwab.
MOVING TO SIDELINES ON TD AMERITRADE: In a research note to investors, Morgan Stanley's Cyprys downgraded TD Ameritrade to Equal Weight from Overweight ahead of second quarter earnings, stating that he sees a more challenging path to revenue growth given the less favorable interest rate and client cash environment. He also lowered his earnings per share estimates across the discount broker stocks he covers by 4% on average for 2019 and by an average of 6% for 2020, noting that he cut his estimates the most for TD Ameritrade in 2020, lowering them by 11% due to lower yields and client cash balances. The decline in the yield curve reduces upside from reinvesting TD Ameritrade’s $90B maturing fixed rate portfolio, with the revenue boost from rolling that portfolio declining by more than 75% given the decline in yields, he contended.
The analyst acknowledged that he expects client cash balances to rise if the Fed cuts rates by 100 bps, but sees peers Charles Schwab and E-Trade (ETFC) as better able to monetize rising client cash balances, whereas TD Ameritrade shares economics with TD Bank. While 2019 is "shaping up to be a tough year for eBrokers' stocks," Cyprys said he sees Charles Schwab as best positioned for an upside surprise given what he views as "overly bearish" investor sentiment, and reiterated an Overweight rating on the shares as he believes investors are too bearish on the organic deposit outflow trajectory over the past 18 months caused by large-scale cash transfers to lower yielding bank sweep products. The analyst lowered his price target on TD Ameritrade shares to $53 from $61, on Charles Schwab shares to $46 from $53, and on E-Trade shares to $55 from $61.
'CATALYST CALL': Meanwhile, Deutsche Bank analyst Brian Bedell initiated a short-term "Catalyst Call" pair trade idea of long TD Ameritrade against being short Charles Schwab. The analyst told investors that he expects Ameritrade to outperform Schwab by at least about 5% through the second quarter earnings season. While Bedell expects second quarter earnings to be less volatile with fewer surprises than in the first quarter, he sees some important differentiation within his subsectors that should drive some performance disparities between stocks. Within online brokers, the analyst sees TD Ameritrade as best positioned within the falling interest rate backdrop, especially versus Charles Schwab.
PRICE ACTION: In afternoon trading, shares of TD Ameritrade and Charles Schwab have both gained about 1% to $50.41 and $40.04, respectively.
"Street Fight" is The Fly's recurring series of exclusive stories that highlight a stock or sector that is in focus amid divergent views from Wall Street analysts.