Wells Fargo Downgrades Online Brokers, Says Finding Bull Case 'Has Become Very Difficult'

The recent wave of commission cuts among online brokers has generated even more fallout on Thursday, with another analyst downgrading the group.

The Analyst

Wells Fargo analyst Christopher Harris issued the following downgrades on Thursday:

• TD Ameritrade Holding Corp. AMTD downgraded from Outperform to Underperform, price target cut from $58 to $30.
• E*TRADE Financial Corp ETFC downgraded from Outperform to Underperform, price target cut from $55 to $37.
• Charles Schwab Corporation SCHW downgraded from Outperform to Market Perform, price target cut from $50 to $39.
• Interactive Brokers Group, Inc. IBKR maintains at Underperform, price target cut from $43 to $40.

The Thesis

Harris said online brokers are dealing with the perfect storm of slowing organic revenue growth, falling interest rates and evaporating commission revenues.

“While we generally don’t like to lower ratings after such a material event (SCHW’s reduction of certain commission rates to zero), we believe that identifying a bull case for this group now has become very difficult,” Harris wrote in a note.

Harris said the brokers will have to resort to cutting expenses and buying back shares of stock to drive earnings growth in the near term, two strategies that typically don’t get rewarded in the market.

Harris said TD Ameritrade has the worst EPS growth profile of the group and is also battling corporate governance missteps as well. Wells Fargo anticipated trading commissions would ultimately go to $0, but he is surprised Schwab started the domino effect during one of the most difficult macroeconomic backdrops of recent years.

Wells Fargo cut its 2020 and 2021 EPS estimates for the group by an average of 21%.

Related Link: 'Zero Commissions Now A Reality': Wall Street Reacts To Broker Commission Cuts

Benzinga’s Take

If online broker stocks keep falling, they might be worth a look at some point based strictly on valuation. However, with little clarity on how much of an impact the recent commission cuts will have on earnings and growth and limited insight into what the online brokers’ new business models will look like, buying the stocks at this time is quite a gamble.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.