Wednesday, July 19, 2006

TD Ameritrade will Contribute $55 Million to TD Bank's Q3 2006 Earnings

  
Bloomberg, 19 July 2006

Toronto-Dominion Bank, the country's second-largest bank by assets, said that its stake in TD Ameritrade Holding Corp. will add C$55 million (U$48.3 million) to earnings in the fiscal third quarter.

The Toronto-based bank owns about a third of TD Ameritrade, which reported earnings yesterday. Toronto-Dominion's third- quarter results will be released Aug. 24, the lender said today in a Canada NewsWire release.
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RBC Capital Markets, 19 July 2006

Investment Opinion

• Ameritrade Beats Expectations. AMTD’s Q3/F06 result beat consensus and the stock traded up US$1.05/share or ~7.7%. We estimate that each US$1/share move in AMTD’s stock price is worth C$0.40/share in value to TD stock. Based on this result, we estimate AMTD will contribute ~$59MMor 6% to TD’s Q3/F06 result, up from our prior $49MM estimate – worth 1¢/share to TD cash EPS this quarter. Last quarter, AMTD added $39MM or 4.5% to TD earnings when TD picked up only 2 months at 32.5% ownership. In Q3/F06, TD picks up 36% of a full AMTD quarter (39.5% thereafter).

• Holding Estimates Steady. Factoring the AMTD EPS result into our TD model indicates potential upside of 2-3¢ in each of 2006/2007, though in the interest of conservatism, we will opt to hold our cash EPS estimates at $4.60/$5.20, retain our $70 price target and Outperform rating.

• Revenue Quality Improving. AMTD’s EPS sensitivity to trading activity is declining. Trade commissions now account for only 39% of revenue, down from 54% in 2005 before the Waterhouse deal. The beneficial flip side is that asset-based and money-market revenue is rising as a percent of the whole. This is fortuitous because the outlook for trading volumes is indicated down ~15%, worrisome in a high fixed-cost business. AMTD’s revenue is now more resilient in weak equity trading markets. For every 15% decline in trades/day, EPS would decline by 9%, less than the 14% sensitivity prior to the Waterhouse deal. The ‘comprehensive’ impact would be lower in our opinion, offset by a shift in client assets to cash balances.

• TD Waterhouse Integration To Beat Plan. The cost benefits of integrating the Waterhouse client base are substantial, including collapsing Waterhouse trading & clearing systems, and converting certain AMTD trading balances to asset management platforms. Management revised up its EPS guidance largely on better clarity around the Waterhouse integration –the plan factors minimal net account growth and conservative revenue growth – both comfortably beaten in this Q3/F06 result.

• Valuation. Our price target of $70 is set at ~13.5x our 2007 cash EPS estimate of $5.20. Our premium target P/E reflects TD’s leading domestic franchise, retail-oriented business mix, unique U.S. assets and excellent management. Our target P/E is set at a 3% premium to the group though TD has traded at an average 6% forward P/E premium to its Canadian bank peers since 1998.
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Scotia Capital, 19 July 2006

Event

• TD Ameritrade reported Q3/06 earnings of US$0.23 per share, versus IBES estimate of US$0.22 per share. At its current ownership level of 39.8%, the contribution to TD Bank is estimated at C$0.10 per share.

• AMTD reduced fiscal 2006 earnings guidance to the range of US$0.87 per share to US$0.93 per share from its previous midpoint of US$0.94 per share and increased fiscal 2007 earnings guidance to the range of US$0.99 per share to US$1.21 per share from its previous midpoint of US$1.06 per share.

What It Means

• Our 2006 and 2007 earnings estimates for TD are $4.50 per share and $5.00 per share, respectively.
• Our 12-month share price target is $70 per share.
• Maintain 2-Sector Perform on shares of TD Bank.
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