E-Trade, TD Ameritrade Upgraded As Market Volatility Returns

Market volatility has returned in 2018, and that could be good news for online brokers. In fact, one analyst has upgraded two popular online brokers and says there could be earnings beats on the horizon.

The Analyst

Keefe, Bruyette & Woods analyst Kyle Voigt upgraded TD Ameritrade Holding Corp. AMTD from Market perform to Outperform and reiterated his price target of $66.50. He also upgraded E*TRADE Financial Corp ETFC from Market Perform to Outperform and reiterated his $61 price target.

The Thesis

There are a number of positive catalysts ahead for online brokers, according to Voigt. First, given the current yield curve, he said net interest margin guidance is likely on the conservative side. Voigt said both TD Ameritrade and E-Trade are well-positioned to benefit from a general environment of inflation and rising rates.

In addition, Voigt said healthy volatility in the market is also good news for profitability.

“More recently, we've seen a return to more normalized equity market volatility and should this persist, we believe that there could be upside to our numbers, even in a scenario where margin balances decline,” Voigt said.

The two stocks’ valuation multiples relative to the S&P 500 have compressed significantly in 2018, including a 16 percent decline for TD Ameritrade and a 12 percent decline for E-Trade. Voigt said this decline is unwarranted and could limit additional downside.

E-Trade appears to be a string buyout target, and Voigt said TD Ameritrade could boost its EPS by double-digits if it decides to pull the trigger on a deal for E-Trade.

Price Action

TD Ameritrade stock traded higher by 1 percent Tuesday, while E-Trade shares climbed 3 percent.

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