Ditch-narrow TD Ameritrade‘s (AMTD) first quarter tax results show positive winds in its core business and demonstrate the transformative nature of the Scottrade acquisition. The company reported pro forma net income, which primarily excludes acquisition-related costs, of $ 455 million, or $ 0.80 per diluted share, for the quarter ended December 2017, from $ 230 million, or $ 0.43 per diluted share a year ago. This was the first full quarter that included Scottrade’s results, leading to a sequential increase in revenue of 28% and an increase in client assets of 33% since the start of July. In addition to the first quarter results, the company has raised its projection of diluted EPS for fiscal 2018 to $ 2.55- $ 3.05. This is around 22% higher than its previous outlook, with the main change being the integration of the finalized tax reform. We are also increasing our fair value estimate for TD Ameritrade from $ 57 per share to $ 60, primarily due to recent tax guidelines.

Signs are that additional benefits from the Scottrade acquisition will trickle down to earnings in the coming quarters. TD Ameritrade expects to complete the transition of Scottrade’s clearing operations in the March quarter, after which it is expected to begin realizing most of the approximately $ 200 million in synergy savings expected in the first year. While it is often reasonable to be skeptical of the revenue synergies associated with acquisitions, it appears Scottrade’s clients traded less derivatives than TD Ameritrade’s clients. As brokerages have higher earnings on options trades, it is quite plausible that more derivative trades with Scottrade clients will increase income, especially if TD Ameritrade leverages its educational offers. Another auspicious metric for the Scottrade acquisition is that net new client asset growth was approximately 9.5% in the quarter, in line with the company’s historical growth rate. This was reassuring, as competitors likely increased their efforts to attract Scottrade customers during the onboarding period.

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