E Portfolio Review: TD Ameritrade, Fastenal, 3M, MSC Industrial, Ulta Beauty

TRADING AWAY TD AMERITRADE

TD Ameritrade (AMTD) reported fourth quarter revenues rose 11% to $1.6 billion with net income up 21% to $551 million and EPS up 25% to $1.00. For the full fiscal 2019 year, revenues increased 10% to $6.0 billion with net income up 50% to $2.2 billion and EPS up 53% to $3.96. Return on shareholders’ equity for the year was 25.4%.

During the fiscal year, the company gained record net new assets of approximately $93 billion, an annualized growth rate of 7%. The company ended the year with client as sets of about $1.3 trillion, up 2% year over year. The company also reported record average client trades of about 860,000, up 6% year over year.

Effective Oct. 3, 2019, TD Ameritrade eliminated commissions for its online exchange-listed stock, ETF and option trades, moving from $6.95 to $0. Management expects this decision to have a negative revenue impact of about $220 million to $240 million per quarter, resulting in about a 15%-16% revenue decline. The company will need to work diligently to create new revenue opportunities and to control expenses to replace the lost revenues. The industry-wide commission change to zero commissions will represent challenges for TD Ameritrade in fiscal 2020 with both revenues and earnings expected to decline for the year. In addition, a CEO transition is also underway as Timothy Hockey, the current CEO, announced his resignation due to a disagreement with the Board of Directors.

Given the change in management and the expected decline in revenues and earnings, we decided to sell TD Ameritrade at a loss as the business model had significantly changed. Subsequently, Schwab agreed to acquire the company in a $26 billion all stock deal.

FASTENING IN PROFITS FROM FASTENAL

Despite sluggish business conditions and a cautious tone from customers, Fastenal (FAST) reported third quarter sales, net income and EPS each increased 8% to $4 billion, $214 million and $.37, respectively. Daily sales increased 6.1% year-over-year, driven by higher unit sales from industrial vending and Onsite locations plus higher product pricing taken to mitigate the impacts of general and tariff-related inflation. Sales of fastener products grew 3% on a daily basis and represented 33.7% of sales while sales of non-fastener products grew 8% on a daily basis and represented 66.3% of sales. The company opened two branches during the third quarter and closed 22, ending the quarter with 2,146 branches. Fastenal activated 84 Onsite locations in the third quarter of 2019 and closed 35, ending the quarter with 1,076 active Onsite locations.

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