Analysts Will Soon Upgrade E-Trade

E-Trade's (ETFC) capital restructuring announcement is very welcome news. Although the stock sold off irrationally, the fact that ETFC's bond rallied to 98.5 reaffirms that ETFC is turning the corner.

The risk of default is significantly decreasing and ETFC is on its way to increasing capital ratios, reducing balance sheet risk, and significantly reducing its debt burden. Key points to consider regarding ETFC are as follows:

1. ETFC will reduce its interest expense by $150 million, which is a pre-dilutive reduction of $0.26 per share. Even if ETFC offers 572 million shares (to double the existing float), there will be a reduction of $0.13 per share.
2. Loan delinquencies in the Home Equity Portfolio (loans with the greatest loss severity) decreased 11% month over month, another consecutive decline.
3. Brokerage business continues to exceed expectations.

I strongly believe that the stock will rally in the near-term, much as other financials who have raised capital. Examples are as follows:

• Wells Fargo (WFC): 392.15 million shares of its common stock at $22.00 per share ($8.6B). Current $23.09
• Texas Capital Bancshares, Inc. (TCBI): 4 million shares priced at $13.75 ($55M). Current $14.43
• Morgan Stanley (MS): 168 million shares priced at $24 ($4B). Current price $27.48

Analysts will soon upgrade ETFC and you can bet the share price will rise significantly. I expect ETFC will reach $4 a share by next year, and on that note it would be a smart time to buy.

Disclosure: Long ETFC and buying more.

Comments

[User 406682:]

the max offering is at 1.2 which is over a 20% increase from the price of 1.46. The other stocks mentioned are not up by 20%. U forgot to mention that total delinquent loans in its residential mortgage portfolio rose 9% during the same two months.

Jun 18 05:16 AM

[Advill:]

In your opinion the analysis is then wrong?, mortgage delinquency 9% increase how does that affect ?

Regards.


On Jun 18 05:16 AM User 406682 wrote:

> the max offering is at 1.2 which is over a 20% increase from the
> price of 1.46. The other stocks mentioned are not up by 20%. U
> forgot to mention that total delinquent loans in its residential
> mortgage portfolio rose 9% during the same two months.

Jun 18 08:24 AM

[Pj568:]

Improved ratios come at a high cost.

So with the new share issued and with full conversion on the new convertible debt the number of shares increase from 600M to 2B.

Citadel now has around a 20% interest and after the new issue and conversion will have a 40-45% interest.

Jun 18 09:08 AM

[22thoroughbred:]

I bought 1000 Jan 2011 calls strike price $5 and paid .25 may buy some $2.50 if I can get em for less than .50

Jun 18 09:54 AM

[Jim Rich:]

Total delinquencies are about the same month over month, however those over 180 days are being written down, which means these improvements in sub 180 delinquencies are extremely positive.

Since the government refuses to properly manage TARP monies availability, the Citadel agreement guarantees ETFC the cash needed to weather the crisis. There is no longer a threat of ETFC disappearing which was the primary reason their stock price was still such a bargain. Not only that, but it reduces the amount it has to repay in interest over time and reduces the longstanding debt by converting it now, so the deal has three huge positives in that regard. I see no reason why the max price Citadel is paying must match market price or even influence it; ETFC is after all essentially selling debt and there is benefit to both ETFC and Citadel with this deal.

I also suspect with the money they need now available, they will change their accounting method as other banks did in the first quarter and start showing a profit (as they would have in first quarter, had they done it then). Whether the deal is close enough to do that this quarter or next is the question, but I'd give it a 60% or better chance of happening now.

Jun 18 01:04 PM

[capn68:]

I was just reading a bit about Citadel and Griffin and stumbled across this article from late last year. Could Citadel be looking at ETFC as a vehicle to go public? I mean, everyone seems to be trying to figure out the strategy, Schwab seems to be smarting over not being able to take etfcs brokerage accounts for a discount, banking trends are certainly changing - the big investment banks are becoming bank holding companies .... I don't know, have a read and tell me what you think. Kinda makes sense to me - there's a sentence in there that says Citadel has a stockpile of like $6billion in cash.
dealbook.blogs.nytimes.../

Jun 18 05:28 PM

[capn68:]

I was just reading a bit about Citadel and Griffin and stumbled across this article from late last year. Could Citadel be looking at ETFC as a vehicle to go public? I mean, everyone seems to be trying to figure out the strategy, Schwab seems to be smarting over not being able to take etfcs brokerage accounts for a discount, banking trends are certainly changing - the big investment banks are becoming bank holding companies .... I don't know, have a read and tell me what you think. Kinda makes sense to me - there's a sentence in there that says Citadel has a stockpile of like $6billion in cash.
dealbook.blogs.nytimes.../

Jun 18 05:29 PM

[capn68:]

I was just reading a bit about Citadel and Griffin and stumbled across this article from late last year. Could Citadel be looking at ETFC as a vehicle to go public? I mean, everyone seems to be trying to figure out the strategy, Schwab seems to be smarting over not being able to take etfcs brokerage accounts for a discount, banking trends are certainly changing - the big investment banks are becoming bank holding companies .... I don't know, have a read and tell me what you think. Kinda makes sense to me - there's a sentence in there that says Citadel has a stockpile of like $6billion in cash.
dealbook.blogs.nytimes.../

Jun 18 05:30 PM

[sbass99:]

More brilliant analysis from Jeremy! The reason the bonds are trading at par is because THEY ARE GETTING 75% OF THE COMPANY! The fully diluted sharecount will be 2.25BLN. This trade has nothing in common with MS/WFC where dilution was minimal. When is Jeremy gonna stop costing readers money? The stock will now trade between 1.25 - 1.75$ as the market comes to grips with 15 cents of 2011 fully diluted earnings power. If you dont know what i am talk about stop trading etfc.

Jun 19 07:54 AM

[will28307:]

I bought this one at $2.40. Will I ever get my money back?

Jun 19 09:22 AM

[thefockers:]

I thought I would copy a comment a poster made on Etrade not more than 2 weeks ago.....as their actions speak clearly for themselves.....ETRADE's CEO only cares about their most important investor...not all of their investors:

Mortgage related losses have pretty much stopped, Etrade has a bulk of provisions available anyway, and the brokerage business churns out $200m+ profit per quarter. Let's really think about the valuation of this company, because only then can we estimate what the stock price should be or what it will be:

What would you pay for a reliable machine that pays you $2 per quarter ($8/year)? Would you pay at least $32 assuming it would keep paying out for at least 4 years and every year thereafter would be pure profit? Sure you would. Under the same logic, then Etrade's $200m year brokeragebusiness is worth $3.2b or at least $5 per share for current shareholders. Surely some monster company would buy this company for just $3.2b. Remember, this industry's international account growth has only scratched the surface. What will things be like in 5 to 10 years?

CEO Decision: Sell company now for at least $5 per share?.......or borrow more (which will dilute the current shareholders and drop the stock price to about 1/2 its current value)? Which would you do if your job was to represent ALL investors? Watch the news because I expect it to happen soon.

Investor Decision: Strong Buy


I guess he is wrong!

Jun 19 09:48 AM

[sbass99:]

Your analysis is off by a factor of 10! There are now 2.25Bln fully diluted shares - what dont you understand? Recurring earnings power (post the 2009-2010 writedowns) in 2011 is 15 cents a diluted share. Existing shareholders have been rinsed with a 75% dilution because otherwise E*Trade would file Chpt11 and you would get 0. You should have bought the bonds...not the stock - but Jeremy doesnt understand.

Jun 19 09:59 AM

[licapitalist:]

Mr.Richards,
With over 20 years of experience, your opinion on June 15, that ETFC will be in the mid 2 this week looks to be COMPLETELY WRONG. The stock is at the low 1's this morning. Almost a 50 % drop from where you picked it to be. It just goes to show that it doesn't matter the years of experience or what you may do for a living, picking stocks is a crap shoot and anyone can do it.

Jun 19 10:02 AM

[Al the pal:]

Heloc losses are continuing and show no sign of ending anytime soon. Massive dilution that only covers the losses for about another 6 months. More dilution down the road. This stock is destined to be a penny stock maven for many years or until bankruptcy finally does them in.

Jun 19 04:20 PM

[KJP712:]

When a company the size of Citadel puts it's weight behind a stock there has to be a reason for that.To follow it to Bankruptcy? Doubt it.As previous poster stated E-trade is a piece of the puzzle for Citadel to go public,something it was planning to do in the spring of 2008.Market conditions prevented that but the original plan will eventually be carried out.Look for Citadel to join Goldman Sachs and Morgan Stanley in this new financial sector taking the place of the old one which had also included Bear Stearns,Lehman,and Merrill.E-trade is a buy for the long-term.

Jun 20 01:51 PM

[Al the pal:]

"We continue to firmly believe that E-Trade will likely be bankrupt or sold by mid-year 2010, with the latter now looking more likely," Trone wrote in a note to investors. He thinks the brokerage could be sold for $3.51 a share, with the bulk of proceeds used to repay debt and $1.68 in cash left for shareholders -- a 33 percent gain from the current price.

Finally some real analysis that looks accurate. 33% gain or 100% loss in a year. It's been nice knowing you ETFC.

Jun 22 10:50 AM

[Axolotl Folly:]

That note from Trone was an "Upgrade" - the first of many. The company being sold is far more likely than bankruptcy, which has now been taken off the table. The brokerage alone is worth $7-10B and is generating substantial earnings, and would be no shortage of potential buyers.

Ken Griffin knows more about convertibles than most people, that's how he built his fortune and he wouldn't ruin his reputation by throwing good money after bad with the Citadel ETFC investment.

The HELOC loan portfolio is in run-off mode, and has been for some time now. The losses there will get sequentially smaller.

The equity raise was highly dilutive, but prior to that the stock was priced for bankruptcy anyway. The fact is they were able to raise a large amount of money (relative to their market cap) with no help from the taxpayer. That's something BAC or C couldn't do in this market.

Don't know about you, but I'll take my chances with ETFC ahead of a taxpayer-sponsored full-service broker.

Jun 22 10:09 PM

[User 395786:]

nice forecasting and insight on the upgrades.
Now I hope your prediction of a takeover (hopefully in the $5 range) comes true as well.

I am long, and have been for some time now.

Sep 25 11:48 AM