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:
- 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.
- Loan delinquencies in the Home Equity Portfolio (loans with the greatest loss severity) decreased 11% month over month, another consecutive decline.
- 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.