Why E*Trade Is a Must Buy

E*Trade (ETFC). Analysts believe it's now undervalued after trading near $2 less than a month ago. Now at $1.84, ETFC may soon receive a buyout offer. The people I speak with guess $3 to $4 a share will be the offer and could come any day. A few years ago analysts said ETFC could fetch between $10-$11 per share on a buyout deal. Now the book value is about $2.70 a share. Cost savings to an AMTD bottom line of a merger make a lot of sense. ETFC CEO Donald Layton will step down at the end of the year. The poison pill is out; this makes a takeover very easy.

September 18, 2009

Goldman Sachs upgrades E*Trade from Neutral to Buy and raised their 6-month price target from $1.70 to $2.30. The firm cited improving trends in the bank and broker segments.

The firm said,

With improving delinquency trends in the home equity line of credit portfolio and solid brokerage trends, E*Trade appears to have turned the corner in its performance and we estimate the shares have 35% upside from current levels.

September 15, 2009

FBR Capital bumped their price target on E*Trade from $2.00 to $2.25, reiterating their Outeprform rating, citing increased confidence in E*Trade's return to profitability and the improving state of credit and capital at E*Trade Bank.

FBR commetned,

Notwithstanding strong client activity in August, investors should focus on evidence of continued improvement in delinquency trends in E*TRADE's $8.8 billion HELOC portfolio, as well as stabilization in delinquencies in the $11.4 billion one-to four-family portfolio.

The firm said in HELOC, total delinquencies declined 7.2% quarter to date while early-stage delinquencies held steady. The noted that delinquency trends in the one-to four-family mortgage portfolio were better than expected, as total delinquencies were up just 0.4% to $1.68 billion, loans 30 to 89 days past due fell 6.2% to $528 million, and loans 90 to 179 days past due declined 9.2% to $404 million. Loans delinquent greater than 180 days rose 12.2% to $755 million. E*Trade expects total net charge-offs of between $350 million and $375 million during 3Q09, down from $386 million in 2Q09.

September 14, 2009

Citigroup upgraded E*Trade Financial from Hold to Buy and raised their price target from $1.50 to $2.30. The firm said the chance of a takeover of E*Trade increases as loan loss trends have improved.

In 2003, the Toronto-Dominion Bank (TD) held talks to merge its TD Waterhouse discount brokerage with ETFC, but the two sides could not come to an agreement over control of the merged entity. In 2005, ETFC made an unsolicited offer for AMTD, currently the second largest US discount broker. AMTD instead purchased TD Waterhouse, with TD Bank holding a 39% stake in the new entity.

In 2005, ETFC acquired Harrisdirect, formerly a discount brokerage service of the Bank of Montreal (BMO), and BrownCo, formerly a discount brokerage service of J.P. Morgan (JPM).

In July 2008, ETFC sold its Canadian division to Scotiabank (BNS) for CAN$444 million, as part of a program of selling off non-core assets.

In March 2008, ETFC named Donald Layton, formerly JPMorgan Chase vice chairman, as its new CEO. Layton had joined ETFC board of directors in November 2007, at the same time as the Citadel deal. Layton has been aggressively acting on the turnaround plan and the company has stabilized and is seeing the beginnings of a return to growth.

I fully believe ETFC will be bought before the end year. I expect ETFC's stock price will trend above $2 over the next week.

Added note: Great article from istockanalyst out last week on September 17. "E*Trade: Why You Should Buy This Stock Before It’s Too Late"

Disclosure: Long ETFC, GS, AMTD, C

Comments

[effeff63]

Hope you're right...I'm short the ETFC Jan $2.50 calls, and wouldn't mind having the calls exercised.

2009 Sep 21 09:36 AM

[User 488509]

testing

2009 Sep 21 09:59 AM

[User 488509]

As Trone asked,why are they being required by the OTS to raise even more capital so soon after SPO 2 raising $600m and the debt exchange??

2009 Sep 21 10:10 AM

[waf76]

i felt ETFC has been a buy since March 2008 and it have continued to be disappointed. Maybe now is the time.

2009 Sep 21 02:28 PM

[Ravee]

What are the chances Citadel will allow ETFC to get out of their hands?
1. Citadel average price for ETFC is around $2.50 (Please note I did not do exact math). Being an aggressive hedge fund, they would like to make at least 4-5 times profit.
2. Citadel has a fantastic deal to flow 50% of ETFC trades through their systems - and this is a profit making machine for them. Why do they loose this?
3. Citadel has agressive plans to become another Goldman. They need this brokerage platform.

2009 Sep 21 02:47 PM

[market ace]

In my opinion, this is the worst company on the planet! I opened accounts with them and it took weeks to deposit my checks to their bank accounts, they double charged me on trades involving tens of thousands of dollars and giant fights ensued to get my money back. They cheated me out of the free trades they advertised and offered me 3 free trades in lieu of this advertisied benefit. They also posted dividends and interest months after I closed the accounts. They even advertise getting a thousand new accounts a day. I would love to see them prove that one.

In my opinion they are crooks and should lose every customer before long. In about six weeks with them I had about 100+ e-mails and phone calls concerning problems and 3 major SEC complaints were required to finally get all of my money back.

Anyone investing in this company or trusting them with their money is crazy!!!

2009 Sep 21 05:12 PM

[Senan]

Up to $1.99 today. So nearly at the psychological $2 mark. Too rich for my blood. If it hit $1.60 again I'd have a look.

2009 Sep 21 06:19 PM

[buddhabill]

"E*Trade expects total net charge-offs of between $350 million and $375 million during 3Q09, down from $386 million in 2Q09"

...so they are losing 1.3 Billion per year on their loan portfolio, and have EBIDTA of $305mm. No spank you.

2009 Sep 21 06:30 PM

[User 488509]

Why has Griffin divested himself of all his notes if prospects for ETFC are so great??

"
“On August 25, 2009, as described in the preceding paragraph, CEF exchanged approximately $800 million face amount of Springing Lien Notes and approximately $230 million face amount of the 8% Notes for a like face amount of Class A Debentures. On September 15, 2009, the Reporting Persons sold approximately $754 million face amount of the Springing Lien Notes and $50 million face amount of the 7.875% Notes in privately negotiated transactions for cash. On September 17, 2009, the Reporting Persons sold approximately $46.6 million face amount of the 7.875% Notes in a privately negotiated transaction for cash. Following these transactions, as of September 17, 2009, the Reporting Persons owned approximately $1,030 million face amount of the Class A Debentures, no 7.375% Notes, no 7.875% Notes, no 8% Notes and no Springing Lien Notes.”

2009 Sep 21 09:20 PM

[Nettligent]

ETrade management losing its focus and its great assest: excellent customer service. Stop charging customers with all the stupid fees. ETRADE received, deposited, and cleared my checks. My banks confirmed that transaction were done. It took a week for me to trade stocks, etc.
Hopefully, new management cleaned up these stupid tricks and fire these incompetent people.
Overall, ETRADE has a great value. Management must go ASAP.

2009 Sep 22 04:03 AM

[Ryu Mei Co]

I have to agreed that ETFC is a good buy "someday", most of us investors have been burned many times (Ouch!). Right now, the market is overbought but M&A is picking up steam........ hmmm, a small position is not a bad idea actually.

2009 Sep 22 04:17 AM

[Nettligent]

Citadel should take it over, clean up operation, fire useless management and cronies, stop paying bonus until proven, spin off mortgage group, etc ETRADE stock can be $8-10/share within short period of time.

2009 Sep 22 04:18 AM

[ray b]

Love that trading platform

2009 Sep 22 08:08 AM

[RiskAverseAlert]

Great idea! Chase the dead equity of a firm specializing in the retail trade of dead equity. Shall I diversify with a purchase of sovereign debt from Zimbabwe?

2009 Sep 22 08:19 AM

[CoverIsBetter]

Your gut will only get you so far ..

ETrade got the marketing right. Babies with cell phones.

2009 Sep 22 10:53 AM

[jackooo]

market ace
Welcome to the club. I switched to TD. 6 accounts worth $250,000. Then got TD 3 more accounts.
ETFC is the pits. Same problems you indicate and much, much more. Seems like no one is steering the ship.

2009 Sep 22 01:32 PM

[Victor84]

EBIDTA is roughly $300-350 million a quarter, not a year. E*Trade has a great first-in-class platform, both from a presentation and the technology standpoint. I agree that their administrative and customer services can be cleaned up, but there's a reason why E*Trade is growing even in this environment.


On Sep 21 06:30 PM buddhabill wrote:

> "E*Trade expects total net charge-offs of between $350 million and
> $375 million during 3Q09, down from $386 million in 2Q09"
>
> ...so they are losing 1.3 Billion per year on their loan portfolio,
> and have EBIDTA of $305mm. No spank you.

2009 Sep 22 02:09 PM

[Nahuel]

I wonder the core business will ever recover from the crisis.

2009 Sep 22 05:34 PM

[Adam Sharp]

What about their massive debt? Gotta mention that in any buy-rec. And let's talk market-caps, not arbitrary share prices. Not convincing for me, but best of luck on the trade.

2009 Sep 23 01:36 AM

[Michael Clark]

ETFC is a trading buy -- when the market corrects it will correct very hard. Be ready to take your profits. Don't fall in love with this one.

2009 Sep 23 03:07 AM