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.

Gross profit declined 90 basis points to 47.2%, primarily due to increased industrial vending and Onsite location sales, which generate lower gross margins than the company average. During the first nine months of 2019, Fastenal generated $590.3 million in operating cash flow, up 19% year-over-year thanks to effective working capital management. Free cash flow increased 2% to $406 million on a nearly two-fold increase in capital expenditures to expand the
company’s hub capacity, vending devices and hub vehicles. Fastenal paid $126.2 million in dividends to shareholders in the third quarter, up 10% from last year.

With Fastenal’s stock bolting 16% higher during the past quarter and attaining a full value, we decided to fasten in some profits by trimming the position. Fastenal’s stock has risen more than 14-fold over the last 19 years from $2.45 to $35.71 per share.

TAX-LOSS HARVESTING CANDIDATES

For investors with taxable accounts, tax-loss harvesting candidates this year may include 3M (MMM), MSC Industrial (MSM) and Ulta Beauty (ULTA).

Given the softening global economy and the impact of tariffs, 3M lowered their 2019 full year sales and earnings guidance. Amid a weakening demand and pricing environment, MSC Industrial expects fiscal first quarter sales and earnings to decline.

Ulta Beauty’s stock price pulled back sharply during the past quarter and appears undervalued even after the company lowered guidance given industry-wide headwinds the company is seeing in the U.S. cosmetics industry with both prestige and mass market makeup trends soft.

With the proceeds from TD Ameritrade and the profits from Fastenal, we plan to buy General Dynamics (GD) (see related article) and add to our positions in Canadian National Railway (CNI) (see related article) and Maximus (MMS) (see related article).