E*Trade: Very Undervalued

 |  Includes: AMTD, ETFC, SCHW
by: Jeremy Richards

E*Trade (ETFC) is just 3 trading days away from its earnings report. Next week will be exciting for investors. I shall stick to my guns and stay invested in both my own account and the fund I manage.

I believe ETFC is very undervalued. When I look for undervalued stocks, I look at the Price/Sales ratio which should be below 1.5 to be undervalued and below 0.75 to be very undervalued. ETFC's Price/Sales ratio is just 0.66, based on trailing 12 month sales. TDAmeritrade (AMTD) has a P/S ratio of 4.93 based on trailing 12 month sales. Charles Schwab (SCHW) has a P/S ratio of 4.79 based on trailing 12 month sales

Another important issue is sales growth and the rising rate of quarterly sales growth. To evaluate this, the change from this quarter last year to the present quarter (-4.4%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (-22%) of the current year.

ETFC is undervalued as it shows a rising trend in the reported earnings for the most recent quarters. ETFC's earnings per share for the past 2 quarters ( -0.41 and -0.22) have been increasing. The current earnings estimate for next week is -0.08. Earningswhispers has ETFC at 100% chance it will beat the estimate for next week.

ETFC is also trading well below book value of $2.67 a share. AMTD has a book value of $5.76 and is trading at $19.84 a share. SCHW is trading at $18.02 and has a book value of $3.97.

In September, ETFC had three major analysts turn bullish and raise their opinions and price targets by substantial percentages. Below are the detailed analyst reports.

September 14, 2009

Citigroup upgrades E*TRADE (Nasdaq:ETFC) from Hold to Buy, also raising its price target from $1.50 to $2.30.

The firm reduced its FY09 and FY10 loss estimates from $0.52 and $0.15 to $0.43 and $0.09, respectively, saying the recent $1.7 billion debt exchange has eased capital concerns. The Street is currently looking for a FY09 loss of $0.65 and a FY10 loss of $0.02. Citi sees loan losses through 2012 of $6.4 billion, or about 20% of E*TRADE's mortgage portfolio, but also expects higher rates of provisioning during the next ten quarters despite slowing 30-89 day delinquency trends. As E*TRADE's portfolio continues to stabilize, Citi believes there could be an increased likelihood for a potential takeover bid by competitors like Charles Schwab (Nasdaq: SCHW) or TD Ameritrade (Nasdaq: AMTD).

September 15, 2009

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

FBR commented, "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 18, 2009

Goldman Sachs upgrades ETrade 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."

The firm also cited 10% probability to a potential take-out, which has increased in recent days as ETFC has signaled it will replace current CEO Don Layton.

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.

You decide if you think the analysts are correct. Given all the recent buy rating upgrades, ETFC now at $1.62 doesn't reflect any of the analyst rating changes. New investors buying now get a huge discount to ETFC's fair value.

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Disclosure: Long ETFC, AMTD and GS.