Selling E*Trade

| About: E*TRADE Financial (ETFC)

In a letter to E*Trade (ETFC) CEO Steven Freiberg, Citadel, the largest stockholder of the company, requested a special shareholder meeting to consider putting E*Trade up for sale. Citadel further asked for the replacement of certain directors, and a greater accountability of the board to shareholders.

As a long time customer, I’m against the proposal. I won’t sell E*Trade to anyone, as I’m very happy with the service, especially the platinum group division, whose services are much better than those of Fidelity. But as a current shareholder, I’m for the proposal. I will sell to anyone who is prepared to enhance shareholder value, because the current leadership hasn’t. Just take a look at some of the highlights of the second quarter 2011 results:

  • Net income of $47 million, or 16 cents per share compared to 16 cents per share in prior quarter.
  • Total revenue of $518 million, down from $537 million in prior quarter.
  • Daily average revenue trades of $148,000, down 17 percent from prior quarter.
  • Net new brokerage account of 25,000, down from 51,000 in prior quarter.

E*Trade stock has far underperformed against peers like Ameritrade (AMTD) that is beating E*Trade in most key financial metrics, especially in profit margins.

E*Trade versus Ameritrade financial performance statistics in 2011:



Profit margin



Operating Margins



Qtrly Earnings Growth (yoy):



Qtrly Revenue Growth (yoy):




E*Trade’s problems are problems of leadership, the strategic choices the company has made in the last 10 years. Going outside its core business into the mortgage market, shortly before the subprime crisis — a move that left the company heavily indebted — E*Trade has $10 billion in debt compared to only $1.2 billion at Ameritrade. Also, there's the expensive and ineffective marketing campaign" E*Trade's commercials feature a baby trading. I’m not sure what the message is trying to convey to current and prospective customers. E*Trade further organizes investor conferences in New York City during trading hours. Does anybody in the marketing department of E*Trade ever bother to calculate what was the cost of forgone trades?

A happy customer isn’t always a happy stockholder. I will sell my shares to the highest bidder.

Disclosure: I am long ETFC.