How Much Is E*Trade Really Worth?

Ameritrade (AMTD) and E*TRADE (ETFC) report earnings yesterday. AMTD reported earnings of $.26 before the bell beating analyst estimates by $.04. The online broker said Q4 profits declined by 8.9% but trading activity reached the highest quarterly level ever.

• Average client trades per day surged to 411,000 in Q4, up 35% YoY and up 5% sequentially.
• Client assets increased to $302 billion, up 8% from $278 billion a year ago.
• Net new client assets $5.4 billion.
• TD Ameritrade posted a profit of $156.7 million or $.26 cents a share below the $172 billion reported a year earlier.
• Revenues increased by 1.3% to $657.9 million.

FY 2010 guidance and valuation for AMTD:

The average AMTD analyst estimate for 2010 EPS is currently $1.26, in the middle of the company provided range. Analysts have the revenue estimates at $2.68 billion for 2010 also in the middle of the range provided by company management. Our proprietary YCHARTS valuation model has AMTD valued at just under $20 a share so we see the upside limited with the stock currently at $19.36.

E*TRADE reported after the bell yesterday. Analysts expected continued strong performance from the brokerage unit. The loan portfolio results and guidance are key. E*TRADE took huge losses over the past several quarters related to the loan portfolio. Analysts are expecting a loss of $.06 on revenue of $202M.

Source: Yahoo! Finance

Recent Events

Analysts at Citi and FBR Capital upgraded ETFC shares but the stock has traded sideways. In addition, Citadel diversified its holdings selling a large number of shares recently that put pressure on the stock.

Valuation

It is hard to put a value on E*TRADE given the negative earnings but the price to sales ratio tends to provide a good signal for companies that are experiencing rough times. ETFC is currently trading well below its peers.

E*TRADE continues to deal with the hangover from the credit crisis but recent guidance suggests the worst is over. On 9/15/09, E*TRADE provided guidance on the loan portfolio with estimated net charge-offs of $350 million to $375 million and estimated provisions for loan losses of $300M to $375 million.

E*TRADE Business Update Highlights 9/15/09:

• Exchanged $1.7 billion of high yield debt for zero coupon convertible debentures which reduced annual interest payments reduced by $198 million.
• QTD DARTs 17% increase YoY.
• Record accounts 8.5% increase YoY to 2.7 million brokerage accounts.
• Home Equity delinquencies significantly lower, down 34% YTD.
• 1-4 Family delinquencies gradually lower, down 12% YTD.
• Loan loss provision and internally generated bank capital reaching break-even point.
• 29% decrease in loan portfolio from 9/30/07 to 6/30/09, $32.3 billion and $22.9 billion respectively.
• 77% reduction in undrawn home equity lines.

Here is the deck E*TRADE management presented 9/15/09

ETFC Summary

• Consider recent analyst upgrades
• Improving loan portfolio trends
• Much lower interest expense
• Brokerage business strength
• Relative price to sales valuation
• Potential for acquisition

If the economy improves in 2010, expect E*TRADE to trade up significantly from here and the loan portfolio trends to continue. There is significant risk in ETFC given the level of uncertainty in the loan portfolio and the real estate market overall but we see the risk/reward as positive at these levels.

Disclosure: Long ETFC

Comments

[doodoo:]

This seems to be a common theme here that ETFC is a good stock to put money into but the market is not getting in lockstep with your thoughts.I for one have bought in with your thinking and am waiting for the good times to roll.So far I have taken a small loss.Am now considering putting in more money.Wish me luck.

Oct 29 08:13 AM

[protrader101:]

E*Trade: A Screaming Buy 1 comment
Oct 28, 2009 11:32 PM | about stocks: ETFC

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E*Trade(ETFC) Is now at such an undervalued level, its a screaming buy trading at just $1.46. I am rather shocked its trading this low, surely many other investors must be. I am holding my position and in no way am I selling under $2 as I firmly believe ETFC to be a turn around story. ETFC has had large swings in its stock price, and I bet it will see $2 a share before the end of 2009.

I strongly believe the earnings report shows a clear sign ETFC has turned itself around and will be profitable by next year. A few noted remarks on the earnings conference call by the CEO, "ETFC bank will soon be at the breakeven point where it internally generates rather than uses regulatory risk weighted capital. As usage has been quite small for two quarters now, we expect this to occur soon and we will continue to be opportunistic in tactical bank balance sheet transactions such as this quarter's home loan banking repayments or the loan portfolio sale as we continue to reduce the capital tied out in our balance sheet."

CEO adds, "First, despite very large credit related losses in the last eight quarters, we proved that our quick and direct action to fix our broken balance sheet was successful. Second, we have been able to develop a balance sheet strong enough we believe to see us through the rest of this horrendous economic cycle while retaining the confidence of our customers. And third, while focused on repairing our balance sheet, we also were able to significantly strengthen the core online brokerage business, with enhanced service quality and a full pipeline of tools and products to retain and grow our market share, and we plan to do even more in the years to come. Many long-time industry participants and observers have told me personally that they are extremely impressed with our performance through this credit cycle. That performance of course was due to many factors, but perhaps the most important one is the strength of our underlying brand and customer brokerage franchise. And also how good the current management team, which will continue on after I retire again truly is; it has been a great honor to work with them."

I still believe TD Ameritrade(AMTD) will make an offer of around $2.50 a share for ETFC. Charles Schwab might step in front of AMTD's offer with a larger one.

In addition, Analyst commented on October 28, 2009, FBR Capital reiterates an Outperform rating on E*Trade (Nasdaq: ETFC), $2.25 price target.

FBR analyst says, "Admittedly, the company has many moving parts, but what is clear to us is the worst is behind the company and profitability should be within reach. Though the road to "normalized" earnings may take upward of three years, we believe ETFC offers significant upside potential for patient investors-particularly given the substantially lower risks to the company post-capital raise...In our view, ETFC has effectively cleared the danger zone and is no longer at risk of needing capital to support the business, although the company may choose to raise equity to accelerate the de-leveraging of its balance sheet. With provision and charge-offs declining 14% and 9%, respectively, along with the shrinking balance sheet, we believe the bank is now at the point of generating capital.

"To reflect better-than-anticipated 3Q09 results and our forecast for a slowing in the rate of credit improvement, we are lowering our estimate by $0.04 to ($0.46) for 2009 and by $0.04 to ($0.03) for 2010. Note, we expect the company to break even in 3Q10 and turn a profit in 4Q10...Our $2.25 price target is based on a $3 franchise value (a 15x P/E on $0.20 of normalized earnings) discounted back over three years plus approximately $0.10/share of present value related to the $1.6 billion deferred tax asset the company holds. Note that a more rapid return to profitability increases our franchise target value, as we believe it would increase the attractiveness of ETFC for acquirers."

Oct 29 08:19 AM

[Luke Skywooker:]

book value would dictate a price of $3.00 when compared to other brokerage houses. My current plan is to hold for that number, which I expect within 2 yrs. 100% gain in 2 years isn't bad. I dont own many other stocks with that potential.
ETFC is following the trend of home gamers switching to discount brokerages. This should continue unless economy melts down.

Oct 29 11:36 AM

[danS:]

In your calculations you must incorporate the bond holdings that can be converted in the future to stock by Citadel. If you do the actual number of shares outstanding is 2.9 billion not the 1.8 billion typically reported on the financial pages.

Before the financial crisis E-trade had a market cap between 8 and 10 billion dollars. Dividing this number by 2.9 billion yields a stock price of between $2.75 and $3.40.

Oct 29 12:18 PM

[akonforty:]

It does seem that ETFC is a significant and hard to find low-risk opportunity. However, everyone seems to acknowledge that a continued credit quality increase and decrease in loan delinquency/default is essential. So, question: what do we know about any offshore Special Investment Vehicles, i.e., offshore holding companies used to hold loans off the balance sheet. We know Lehman and Bear had these . . . do we know whether ETrade has them?

Oct 29 10:39 PM

[The Alchemist:]

I got in at 1.67 but out at 1.5 tho today I'm back in, we'll see what happens. I think it is possible to see a price as low as 1.25, though, so I am definitely not putting all my money in this time lol, at least not yet.

Nov 02 02:22 PM

[User 402678:]

Etrade has proven it will breakeven by early next year and soon will be profitable in business again. E trade is differ from financial and banking sectors where still a long way for recovery (takes times), but by next year E trade will anounce of being producing moneys and i trust it will shoot up to USD 6 by next year june whereby US economy are toward recovering with stimulus plan from the goverment.

Nov 03 11:26 AM