From Morgan Stanley analyst Scott Patrick's note to clients:
Solid 1Q05; Valuation Looks Compelling
E*Trade generated 1Q05 operating EPS of $0.21, a penny above our estimate
Revenues exceeded expectations by 3.4%, though much of the upside was driven by higher gains on sales of loans and securities, which we view as a lower quality source of revenues. Higher expenses and loan loss provisions represented a partial offset. Excluding the impact of the higher than expected gains and a somewhat higher tax rate, EPS for the quarter were in line with expectations.
Integration creates leverage points
Management indicated on the conference call that a customer who holds $15,000 in cash balances is now as profitable as an active trader executing 5-6 trades per month.
Though there are a number of moving parts in our underlying assumptions, our operating EPS estimates for 2Q05 and 2005 remain unchanged at $0.22 and $0.91, respectively. For 2006, our operating EPS forecast increases to $1.08 from $1.06.
We reiterate our Overweight rating and our $15.75 price target
In our view, investors continue to underestimate the value of having increasingly integrated banking and brokerage operations under one roof. And with shares of E*Trade now trading at a forward P/E of just 11.9, fully 29% below the four-year mean, we view recent weakness as a solid buying opportunity (though some ongoing choppiness is to be expected in the near term).
Industry View: In-Line
We continue to favor retail brokerage companies over non-diversified institutional equity players.