DJ Online Broker Stocks Fall Because the End of Trading Commissions Could Hurt -- Barrons.com

By Teresa Rivas

Zero fees? That'll cost you.

Shares of Charles Schwab (ticker: SCHW), E*Trade Financial (ETFC), and TD Ameritrade (AMTD) are all trading down on Wednesday, following a double downgrade from Barclays , which cites the continuing fee war in the industry.

The back story. It has been tough for online brokerages in 2019. This year, Schwab shares have fallen 10.8%, E*Trade has lost 17%, and TD Ameritrade has tumbled 30%, all during a period when the S&P 500 has risen more than 17% and the Financial Select Sector SDPR ETF (XLF) is up 13.3%.

A big part of that decline stems from Schwab's decision to end online trading commissions on stocks, ETFs, and options, which Barron's warned could also hit E*Trade's and TD Ameritrade's earnings (the latter has already matched Schwab's offer). The race to zero isn't new, but it has been costly for the online brokerages that feel they have no choice but to match competitors' rates.

What's new. On Wednesday, Barclays' analyst Jeremy Campbell cut his rating on Schwab, E*Trade, and TD Ameritrade to Underweight from Overweight. He lowered his price target on Schwab stock to $34 from $48 and cut his targets on E*Trade and TD Ameritrade to $31, from $56 and $57, respectively.

The move is squarely down to the new commission cuts, he says. "There are downside uncertainties to EPS [earnings per share] and while better than modeled operating expense offsets are absolutely possible, the bigger concern is around the 'right' multiple to put on these businesses."

Looking ahead. Campbell also slashed his fiscal 2020 earnings per share estimates by 12% for Schwab and 30% for both E*Trade and TD Ameritrade.

Moreover, he's cautious that M&A could save the day. The idea of consolidation hasn't been as prominent since E*Trade declined to pursue any deals following its strategic review in 2018. But the new cuts could renew calls for some deal-making in the space, as synergies and better earnings prospects could offset the commission-revenue losses. While the stocks could get a near-term bounce on any M&A news, the analyst warns that "the bigger problem we see is that the market hasn't penalized the eBroker price-to-earnings ratios...and a lower P/E could weigh on any longer-term combination and/or the price an acquirer would be willing to pay. Ultimately, M&A could make these stocks look more 'fairly valued' than under- or overvalued."

Schwab stock was down 2.9% to $36.68 in recent trading, while E*Trade was off 2.5% to $35.61, and TD Ameritrade was falling 2.8% to $33.70.

Write to Teresa Rivas at teresa.rivas@barrons.com

(END) Dow Jones Newswires

October 02, 2019 12:27 ET (16:27 GMT)

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