Keefe, Bruyette & Woods analyst Kyle Voigt has upgraded TD Ameritrade Holding Corp. and E*TRADE Financial Corp. to "outperform," primarily for valuation-related reasons, but he also sees improved conditions for the discount brokerage space as a whole.
The current backdrop of "strong" economic growth, increasing interest rates, high consumer confidence and recently, a more normalized level of equity market volatility provides a good operating environment for the e-brokers, according to Voigt. While risks of pricing actions remain, Voigt believes that the outcome will likely be manageable for the two companies.
Voigt also said that a new online brokerage being launched by JPMorgan Chase & Co. could put pressure on e-brokers' commissions as more details become public ahead of the rollout. The offering is expected to be brought to the public in the summer, he said.
The analyst also likes the "downside protection" offered by a potential sale of E*TRADE over the next 12 months. The two companies are also currently trading at a significant discount to historical relative multiples to the S&P 500, which Voigt feels is unwarranted.
Voigt maintained his price targets and 2018 and 2019 EPS estimates for both companies.
