SunTrust Favors TD Ameritrade, Ameriprise In Retail Broker Sector

SunTrust Robinson Humphrey’s Douglas Mewhirter initiating coverage of the Retail Broker Sector, saying that the sector seemed to be on the “cusp of another round of sweeping changes.”

Over the past four decades, there have been massive structural changes in the securities brokerage industry. Analyst Douglas Mewhirter commented that four major trends are now likely to drive another round of sweeping changes. These trends are:

1. Fee pressure
2. The Department of Labor’s Fiduciary Rule
3. Continued rise of the Independent RIA
4. Automation

“Firms that are well-positioned relative to these trends will enjoy a long-term tailwind, while others will need to adapt their business models – at a cost,” Mewhirter wrote.

TD Ameritrade: Attractively-Valued Play

The analyst initiated coverage of TD Ameritrade Holding Corp. AMTD with a Buy rating and a price target of $40.

Naming TD Ameritrade as the “favorite name in the group,” Mewhirter said that the company seemed to have “the best combination of strategic positioning, current earnings power and valuation.”

He added that the company had gained significant momentum with asset-gathering, especially in RIA, while having a “relatively capital light business model,” which bodes in favor of generous dividends and buybacks, without impacting future growth capacity.

Ameriprise Financial: With A Modern Twist

SunTrust initiated coverage of Ameriprise Financial, Inc. AMP with a Buy rating and a price target of $115. The analyst cited the company’s high ROE business model and diversified revenue streams as reasons for the positive rating.

Ameriprise Financial’s shares have been under pressure due to concerns over ramifications of the looming DOL Fiduciary Rule, and are trading significantly below the broker-dealer average and the stock’s historical range. There may be upside once the DOL Rule is sorted out, Mewhirter said.

Charles Schwab: Valuation Full

The analyst initiated coverage of Charles Schwab Corp SCHW with a Neutral rating and a price target of $31, despite the company’s strong competitive positioning.

“The company has the lowest-cost asset platform with the broadest product set (and the #2 robo-broker), but its sheer size limits growth relative to smaller competitors and the capital-hungry bank subsidiary dampens overall ROE,” the SunTrust report noted. Charles Schwab’s shares would be more attractive it they declined to the low-mid $20s. The analyst added that the company is possibly the best-positioned broker to weather the industry’s significant structural changes.

Brokers Group: Share Price Gains

Mewhirter initiated coverage of Interactive Brokers Group, Inc. IBKR with a Neutral rating and a price target of $40, despite the company being the “longest growth runway in the industry” and having a market-leading cost advantage.

Brokers Group’s shares have surged over the past couple of years, and are trading at a significant premium to peers. “While we believe that the company can grow accounts at a low to mid-teens rate for the next 3-10 years, we believe commission growth will not grow proportionally, as the fastest growing customer segments are generally less active than the incumbents,” the analyst commented.

E*TRADE: Better In Low $20s

SunTrust initiated coverage of Interactive E*TRADE Financial Corp ETFC with a Neutral rating and a price target of $25, citing the company’s position in the “highly competitive self-directed retail sector” and its capital-intensive business model.

“While E*TRADE has a very strong brand and management has done a terrific job pulling E*TRADE Bank out of a very deep hole, the underlying market is growing slower than other subsectors and we believe there will continue to be price pressure. We like the stock better in the low 20s,” the analyst said.

LPL Financial: DOL Uncertainty

Mewhirter initiated coverage of Interactive LPL Financial Holdings Inc LPLA with a Neutral rating and a price target of $23, citing the uncertainty surrounding the DOL Fiduciary Rule.

Although the company has the ability to “adapt its highly flexible business model” in response to any change in the DOL Rule, the transition may spell a loss of advisors and/or assets. “We would note that the stock has the most near-term upside in a positive scenario (it could be a $40 stock next year if everything swings its way), but also the most downside in a poor outcome,” the analyst commented.