Should you buy into these rumors? In my opinion, I don't think it makes sense to ever buy a stock simply because the media is circulating buyout, merger, or any other rumors. When considering these situations, you need to step back, study the company, and make sure you're not overpaying for the prospects of the rumor.
Shares of TD Ameritrade sold off hard when the financial sector (as a whole) got hit on rate concerns during the last two months. This trade-off has put the stock at slightly less than 18x earnings. With Charles Schwab (NASDAQ: SCHW) fetching more than 19x earnings, there seems to be a small valuation discrepancy suggesting TD Ameritrade is undervalued. Why? TD Ameritrade is more profitable, expected to grow faster than Schwab in the next year, and grew more quickly than Schwab in the last several years.
More interestingly, TD Ameritrade is currently trading for less than 16x its earnings guidance for this year and less than 13x estimates for next year's earnings! Shares of Charles Schwab, on the other hand, are fetching more than 17x next year's earnings estimates. This huge forward discount makes no sense, in my opinion, and leads me to believe TD Ameritrade is undervalued, merger or no merger.
In its last quarter, TD Ameritrade reported earnings per share and revenues figures which were better than analysts had expected -- a sign that the company's future is being underestimated by analysts. In this same report, the company upped its guidance for the year, suggesting the operating conditions for TD Ameritrade are expected to be very strong for the next few quarters.
As an added bonus, TD Ameritrade has been buying back stock as recently as the last quarter. Since starting its buyback program the company has bought back 17.3 million shares at an average price of $17 per share. This move has increased shareholder value, earnings per share, and the company's overall value.
Would an E*Trade/TD Ameritrade merger make sense? I'd argue the answer to that question is yes! The two companies would have obvious and powerful synergies, the highest market share of any online broker, and a huge base of customer accounts. Operations would become more efficient, customer service could be consolidated, etc. So strategically this deal would certainly make sense and probably please Wall Street.
A merger with E*Trade would help TD Ameritrade significantly. However, even if a merger isn't completed the stock remains very attractive as Wall Street remains behind the growth, the operating environment is very favorable, and the stock is discounted from its slower-growing peer, Charles Schwab.
I believe buying TD Ameritrade makes more sense than buying more 'rumor stocks.'
As an added bonus, TD Ameritrade has been buying back stock as recently as the last quarter. Since starting its buyback program the company has bought back 17.3 million shares at an average price of $17 per share. This move has increased shareholder value, earnings per share, and the company's overall value.
Would an E*Trade/TD Ameritrade merger make sense? I'd argue the answer to that question is yes! The two companies would have obvious and powerful synergies, the highest market share of any online broker, and a huge base of customer accounts. Operations would become more efficient, customer service could be consolidated, etc. So strategically this deal would certainly make sense and probably please Wall Street.
A merger with E*Trade would help TD Ameritrade significantly. However, even if a merger isn't completed the stock remains very attractive as Wall Street remains behind the growth, the operating environment is very favorable, and the stock is discounted from its slower-growing peer, Charles Schwab.
I believe buying TD Ameritrade makes more sense than buying more 'rumor stocks.'
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