Will E*TRADE Surprise or Disappoint Wall Street?

With Alcoa (AA) kicking off earnings season with a bang, many investors are curious about whether E*TRADE (ETFC) will disappoint or surprise Wall Street. E*TRADE’s crucial date will be after the market closes on October 27, 2009.

In order to fully understand E*TRADE’s performance one must evaluate its earnings history. Table 1 shows E*TRADE’s earnings for the past two years. In my opinion, the second half of 2007 and the full year of 2008 was disastrous. The 3^rd quarter of 2007 is when the whole mortgage crises began. Over the quarters, E*TRADE disappointed Wall Street by posting lower than expected earnings. On the flip side, the 2^nd quarter of 2009 showed E*TRADE’s earnings above analysts’ estimates by $0.067 or 23.34%. Ever since the 3^rd quarter of 2008, earnings have been on a rise from $(0.60) to 2^nd quarters $(0.22).

Consensus Earnings vs. Reported Earnings
Number	Quarter Reporting	Date Reported	Earnings Consensus	Earnings Reported	Surprise Amount	Surprise Percent
1	3rd quarter 2007	10/17/2007	0.103	-0.14	-0.243	-235.92%
2	4th quarter 2007	1/24/2008	-2.905	-3.98	-1.075	-37.01%
3	1st quarter 2008	4/17/2008	-0.104	-0.2	-0.096	-92.31%
4	2nd quarter 2008	7/22/2008	-0.141	-0.24	-0.099	-70.21%
5	3rd quarter 2008	10/21/2008	-0.276	-0.6	-0.324	-117.39%
6	4th quarter 2008	1/27/2009	-0.233	-0.5	-0.267	-114.59%
7	1st quarter 2009	4/28/2009	-0.4	-0.41	-0.01	-2.50%
8	2nd quarter 2009	7/22/2009	-0.287	-0.22	0.067	23.34%

Table 1 (Source: www.etrade.com)

Many variables have changed in E*TRADE’s history and in order to get an accurate picture you must take in to account the following:

1. E*TRADE’s delinquencies on its mortgages have dropped dramatically since peaking in December 2008. Special mention delinquencies (30 to 89 days delinquent) are E*TRADE’s greatest exposure to loan losses for its home equity portfolio. From the peak of December 2008 to August 2009 they have dropped roughly 52.24%. E*TRADE’s home equity at risk delinquencies (30 to 179 days delinquent) dropped roughly 40% from December 2008 to August 2009.
2. Month to month DARTS have been at historic highs. In fact, the 3^rd quarter might be another historic month. For the 3^rd quarter DARTS are guaranteed to be larger than 584,675 but will probably be in the range of 693,004 to 747,175. See table 2 for month to month DARTS.

Currently, analysts predict estimates per share around $(0.08). Some analysts predict earnings per share as high as $(0.03) and some as low as $(0.20). Personally, I believe E*TRADE will report better than expected with a slight possibility of producing flat to positive earnings. My reasoning for this is because last quarter’s operating income was $(20,443,000) with 666,103 DARTS. Since DARTS will be higher and delinquencies lower, there is a slight possibility that E*TRADE posts earnings in the green.

Disclosure: Long ETFC.

Comments

[dad_is_board:]

You are just another message board pumper in the enormous circle jerk known as ETFC.

Oct 13 06:00 AM

[tom eieio:]

i have to believe any good news would bump ETFC out of the 1.65-1.70 range its stuck in... What about buyout 2.20- 2.70

Oct 13 09:56 AM

[jackyl:]

I think we are all underestimating what ETFC can produce in the form of revenue once they get out from under their toxic loans. The next two quarters will be critical, my hope is that it will be the beginning of their road to profitability. When that happens, the 'buyout' will be more like a merger.

Oct 13 10:17 AM

[Senan:]

You got your wish. It's out of the $1.65 - $1.70 range, it hit $1.63 at one stage today, so looks like it's going in the wrong direction!

dad_is_board....what you on about?

Oct 13 11:01 AM

[waf76:]

could see a nice pop with an earnings beat but upside is probably limited as this is a bank/brokerage that is not in the gov'ts favor; don't forget the massive short positions in this stock can lead to a short squeeze.

Oct 13 11:12 AM

[Mr. Stupid:]

The buyout offer will come after ETRADE releases its financials at the end of this month.

The buyout candidates are waiting for the numbers to put in a more reasonable offer and ETRADE won't take anything less than 3/share anyway.

If an offer does come in at 2.15-3.00 I would sell and take in the profit real quick since ETRADE will knock this offer down knowing they can and will get more.

I don't charge for my advice,

Mr. Stupid

Oct 13 11:17 AM

[User 488509:]

Mr. Ariaban,

I don't think the nominal earnings number will be the issue for this upcoming report , bigger concerns loom.

First , the loan losses must improve dramatically and even the upbeat analysts aren't that optimistic. Citi analyst Keith Walsh upgraded ETFC but buried in his notes were these less than happy caveats:

"We stress test the portfolio under several scenarios??? - We used the most
conservative scenario of our loan loss models to apply to our valuation
framework on ETFC, generating a 2008-2012 cumulative loss of $6.4B, or
20% of the portfolio. ETFC's portfolio has no commercial loans (52% First
Lien/39% HELOC/ 9% Consumer) and has been running down for the last 18
months.

loan loss trends have improved - Our loan loss model implies higher
rates of provisioning over the next 10 qtrs despite a decline in
provision trend since 3Q08 and slowing 30-89 day DQ numbers across all
loan categories. "

Nine more Q's of losses upcoming,a possible 5 year total loss of $6.4 BILLION-that just doesn't sound bullish even if he's going with "worst case" scenarios.

The next big issue will probably be the exit of Griffin from more than half of his ETFC investments and more on a seemingly daily basis. Wasn't that long ago Layton was referring to Citadel as "our partner" , sure doesn't seem to be behaving like a long term associate?

Finally, the nominal profit or loss will be a messy number due to the incredible dilution occurring in Q3.The shares used in the calculation could range between 1.2 B and 2.9 B depending on a number of factors better left to the accountants.
All I'm sure of is Q4 should be less messy as the conversions finish or stop and we'll know the pro forma will probably use the 2.9 B number. That's a good news/bad news thing as tht many shares will make any loss look smaller but will also seriously cut down any profit they could miraculously squeeze out.

Bottom line , I think focusing on the earning number is misguided.

Oct 13 05:37 PM

[nmelendez:]

E-trade is a lehman waiting to happen. Wait for the Alt-A and adjustable Rate resets in 2010/11

Oct 14 08:34 PM

[Jarhead:]

what buy out and bought out by whom.??????

Oct 14 10:18 PM

[palmer:]

nmelendez adjustable rate resets having any real negative effect is overblown, people are more responsible than we might think, and we can't assume that everyone will be behind on their payments. People actually understand a lot about their debt nowadays.

To the writer of the article Navid: how do you find DART numbers for etrade, and how do you garuntee they will be over 584 thousand?

Oct 14 11:31 PM

[Ferdnerd:]

I like Etrade...it'll go past $2.00 next week and then i'm off to vegas

Oct 22 07:25 PM