E*Trade: Time to Go Long

If you waited for the opportunity to buy E*Trade (ETFC) at a discount, now is your chance and it might not last long. I expect ETFC will trend back to its 50 Day moving average of $1.55 very soon.

New purchase from ETFC Insider Weaver Donna L bought 100,000 shares on the open market at $1.22 a share.

I noted in my prior ETFC article that analysts will soon upgrade and now they are. I expect more will also.

Matt Snowling, an analyst at Friedman Billings Ramsey, says investors should start buying shares of the company and raised his rating from Underperform to Outperform with a $2 price target based on the revised share count.

"We believe the worst is now behind ETFC, as the nearly $2 billion of fresh equity capital at the company should alleviate regulators' concerns and take the worst-case scenario off the table," Snowling writes in a note. "As a result of still strong fundamentals, good cash flow, and increased probability of becoming an acquisition candidate, we believe patient investors will be rewarded for stepping into ETFC at current levels."

David Trone, an analyst at Fox Pitt Kelton Cochran Caronia Waller, also believes that a sale of the company's brokerage operations is becoming more likely.Between the unwinding of the bank subsidiary, a sale of the brokerage operations and the debt repayment, that would leave ETFC shareholders with $1.68 a share in cash proceeds for shareholders, Trone writes in a note in which he upgraded the stock to in line.

Michael Hecht, an analyst at JMP Securities, writes in a note that the common equity ETFC raised and the debt it swapped "should put to rest concerns over capital and survivability."

Speculation that ETFC may be a potential acquisition candidate for either two of its main rivals -- TD Ameritrade (AMTD) or Charles Schwab (SCHW).

ETFC is attractive because of its core customer base. At the end of May, E*TRADE had a record total accounts of more than 4.5 million, which included record brokerage accounts of more than 2.7 million. This included gross new brokerage accounts of 43,000 and net new brokerage accounts of 23,000. Its DARTs (daily average revenue trades) was 239,439 in May, which a 4% gain from April and a 34% gain year-over-year. ETFC also brought in about $500 million in net new assets in May.

Given the recent remarks from the analysts, I believe new investors buying now are getting ETFC at a substantial discount to its fair value of around $2 a share (estimated by analysts at current).

Disclosure: Long ETFC Stop Loss $1.09.

Comments

[Al the pal:]

ETFC is living on borrowed time. Look at a few basic facts. ETFC still has a huge debtload, by exchanging the current debt for a zero coupon convertible note all they are in essence doing is creating a ballon payment at the tail end of a mortgage. If those notes ever get converted to stock you would have more massive dilution to such an extent that the future EPS would get crushed. If they don't get converted, ETFC has a ballon payment of extremely high proportions.

The speculation that a rival may buy them out isn't very realistic in my opinion. ETFC still has a terrible loan portfolio that an buyer would have to contend with and with both Schwab and Ameritrade being more fiscally conservative companies it is highly improbable that they would want to assume that portion of ETFC. The other possibility of course is that ETFC sells off the brokerage assets to a rival, and uses the proceeds to pay down the debt and leaves the rest to stregthening the remaining bank, a bank that is currently just a dry hole that is not making any fresh loans to generate revenue.

The capital raised in the secondary offering, and the debt exchange if it goes through does not stop ETFC's loan portfolio from having additional losses. Even though in the last quarter some metrics of it improved, it still is losing over 300 million per quarter. The money raised after the SPO only extends the time slightly before the OTS is back again telling ETFC to raise more capital. At some point in time the market is going to say enough is enough. Dilution at the extent that ETFC is doing is not beneficial to shareholders. Shareholder value will continue to deteriorate either through dilution or bankruptcy.

Jun 24 03:05 PM

[Kyller:]

I thought they were in fact writing new mortgages. Please provide link to your claim.

Jun 30 09:42 PM