E*Trade Financial: Laying the Foundation for Success 75 comments
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The past quarter has been extremely interesting for E*Trade Financial Corporation’s (NASDAQ:ETFC) investors, board members and management. In an industry plagued with bad news and an asset portfolio heavy in mortgages, it has investors shaking in their boots. But as others are fearful, now is the time to get greedy. With a New CEO, a clear strategy to clean up the balance sheet, and below book value prices for shares of E*Trade, the upside is looking great.
Non-executive chairman Donald Layton (former J.P. Morgan (JPM) supervisor of investment-banking & retail operations) has been named CEO of E*Trade Financial. This is not surprising, considering that E*Trade's retail operation is extremely profitable and their investment-banking side is in need of serious help. Layton seems like a perfect fit to fix this company’s balance sheet.
Now, I can’t not mention that E*Trade currently has about $12B in home equity loans, which will hurt in the upcoming quarters. Further significant write-downs could put a lot of pressure on the company’s earnings and on its liquidity. Investors don’t like this, and it’s currently reflected in the stock price.
Because of this reflection, I’m very excited! Buying companies at roughly their book value in general gives you a good idea on how to justify your purchase, especially for a novice investor. As it stands right now, assuming E*Trade home equity loans hold up to $12B (which will probably drop in value), the book value is $6.12 / share. When the share price is at $4.02 (as of today), this tells me that the price of further write downs are already priced into the stock, giving you some buffer room when that news hits the fan.
At the end of the day, E*Trade has one of the (if not the) strongest brands in the online discount broker space. On top of their strong brand is one of the best trading platforms available online. Behind the brand and the platform, is an extremely profitable retail business model, where E*Trade makes money in both bull and bear markets. Once the investment side is all cleaned up, it’s smooth sailing for E*Trade. All aboard!
Disclosure: Author has a long position in ETFC
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This article has 75 comments:
I am almost kicking myself right now for choosing GRMN over ETFC when it was at $3.80 the other day. Maybe it is good that I waited. Reagrdless, I have confidence in Etrade. They have a great platform. I also think that people are paying their mortgages even though their home value dropped and that the rate of defaults will range widely with various banks. I think ETFC will have the lowest, or if not the lowest, very close to it. Personal opinion.
www.cnbc.com/id/158402...
In his interview with Mr. Rattigan, not once, but twice, Layton said that ET's ABS CDO toxic portfolio was behind ET; over and done with.
Layton also said that, by the end of 2008, ET would be back to where people would think that what Etrade was dealing with in the financial end of its business, would be thought of as "normal business circumstance", and that, in general, the financial industry would be in better shape before the end of 2008. That is before Etrade itself reached that position.
Layton's interview occurred on March 3, 2008...that interview is probably the reason why we are seeing the decline in ET's share price.
Quick money investors, anticipating a merger and acquisition before year's end, are selling, and the traders hare having a field day with the resulting choppy, high beta performance.
During his interview with Rattigan, Layton appeared to be honest and in command. While Layton informed listeners that ET might need more infusion on the financial side, he wouldn't have taken the position he did, accepting a non-cash compensation package, unless there was light at the end of the tunnel.
I believe that Layton thinks that ET's brokerage side can supply the cash necessary to bail out Etrade's banking side, and that if Etrade should require further assistance, there will be such support from lenders.
Lenders will be willing to infuse the remaining necessary cash to cover defaults, because ET will be able to show that it is largely funding its own recovery. That showing will provide the confidence for lenders to provide Etrade with the remaining fractional amount necessary to achieve the last of the mortgage write downs, and to relieve the brokerage side of the immediate, heavy responsibility that it now has and will continue to have in rescuing the banking side of the business.
If worse comes to worse, ET could dilute a bit, issuing more shares for a public sale, or it could float a bond, like other banks have done to acquire working capital.
Mr. Layton was steadfast during the interview, and he did not look slie a liar to me.
hanks for posting this interview. I feel much better about ET and Layton, after viewing it.
I am going back to my Strong Buy sentiment
What you failed to mention is as of last year Etrades mortgage portfolio is 11.8 Billion. Etrade perdicts that they will write down 1.5 billion over the next 3 years.
Response:
I am going to guess that you didn't listen to the conference call, and you have been repeating that information because someone else who didn't listen to the conference call told it to you. Am I right, or am I right?
If you HAD listened to the conference call, you would know that E*Trade DID NOT AT ALL predict a $1.5 billion loss in their present HELOC portfolio. What they said was:
a) The BOD expects the company to show a profit in 2008.
and
b) for those who question that forecast, the BOD believes they used ultra conservative figures such as a POSSIBLE $1.5 billion loss.
The BOD went on to say that they didn't at all believe that they would see $1.5 billion in losses, but had used that number simply to produce a conservative model and to satisfy the doomsdayers who might try to argue that they were unrealistic.
In REALITY, the E*Trade HELOCs have an average credit score of 732 and are performing twice as well as most others, and if we assume that an average of 50% of failures would be recovered by equity foreclosures, to get a $1.5 billion loss, would take $3 billion in foreclosures. That is 25% of their portfolio! Ladies and gentlemen, if you think that 25% of people with an average credit score of 732 are going to fail in the next two years, then you are not talking recession, you are talking depression and armageddon.
I really think that kind of talk is a bit overboard. Lets get back to reality, shall we? The E*Trade BOD is confident that they will generate a profit EVEN IF the country goes into a depression and they were to have to write off an almost unrealistic amount of $1.5 billion.
jegan
So again, please stop lying. By the way, Etrade will have over $1B in cash over well-capitalized levels, thus they will not likely be in such a bad situation again. TMA, unfortunately, does not have ready access to that much cash, hence the margin calls on good assets. Might not be a bad investment at these levels, but I haven't done enough dd on it.
Jegan, you're a customer and I've got a bridge to sell you.
I couldn't find anything.
Mr Egan. You are the first person I have ever heard of having a bad experience with Etrade. Sorry to hear that. I have had nothing but a wonderful experience (except over the last few days with my portfolio crying). Oh well, if the world ends tomorrow, I am just a bit poorer than I was yesterday. Can't really blame Etrade for the world ending too soon now can I?
www.forbes.com/2008/03...
Its basically negative. Then read all the comments which includes a very lively and knowledgeable discussion from both the proponents and opponents. Is all or some of the portfolio in trouble? Only time will tell but all issues seem to be addressed in the discussion. From my perspective, the issue is uncertain. Therefore I'm sticking to the sidelines.
Good luck to all.
$460 million in 2007 - Already taken
$400-$600 million in 2008
$300-$400 million in 2009
Link is here: files.shareholder.com/...
So we are not looking at $1.5 billion in front of us. We are looking at CONSERVATIVE estimates of $700 million to $1 billion
6+ book with an offer on the horizon for buy-out. stay put (no pund intended). who go back to0 calls. Moron
Buy-out on the way like it or not!
Etrades leadership needs to stepup with some positive information. Its as if Layton is sitting on his hands.
Curious as to the smell of your shorts . . .
https://us.etrade.com/...
Don't listen to his jibberish . . .
I may not have 20 years market experience, but I do know that when some guy comes online and starts screaming about how much they know, it is a good sign that something is amiss, very amiss. It is kind of like getting your retirement advice from the yahoos on Craigslist.
In short, I will believe the buy-out talk when I see it. For now, I will focus on how vested, and at what price I want to be in Etrade (for the next year).
How in the world can you compare c.w. and bank of america to etrade? You're shophmoric post is not even worthy of my reply.
ASSUMING that the current rate of default and delinquency continues in Etrade's portfolio (which the current RV portfolio has a DELINQUENCY RATE of 1.1%). The end of the year ALLOWANCE will be 1.96 BLN.
That is the allowance, not the charge off. The charge off was roughly one quarter of that bringing that number down to 490 MLN for the year. I seem to remember that the statement of 1.5 BLN was a charge off statement, I may be wrong. I still don't see the doomsday scenario you propose.
Now, I have not yet had time to look at the 700 mln you are talking about, I will try and find it later. Please enlighten us as to how you concluded that. I didn't see any statement about 700 mln and writedown anywhere. I could have missed though. It is early and I have yet to have my coffee.
I really think you are painting a doomsday picture. ETFC is not CFC. They both have a fc in them, but they are not the same company. Just wanted to clarify that. If what you say really happens, I think we all should seriously consider as to whether you want to stay in the US as it will fold. We all should consider it. Seriously, you underestimate the resilience of people. Especially those with good credit.
More later . . . I am sure
Daffy,
The problem is the allowance for loan losses (which is a good thing) that they added is already eaten up currently non-performing loans that are not writen off. I suspect that they will have about 1bln in not preforming lons this year ( basted on industry-wide increases) requing at least 1 bl increase to loan loss next year alone. If you try to get a valuation based on corporate bond rates and other mortgage transactions, current mark-to-market would result in about 4-5 bln(at least) in writedowns on the total 3bn portfolio. This would more than wipe out the capital that is required for them to stay in business.
The 700 mln was way down their in the annual report. if you really want i can try to find it for you.
I really don't think that they will be writing down a full BLN this year. I really don't. I see their portfolio as stronger than the average joes, and much stronger than CFC. I didn't work for ETFC, so I do not know what their porfolio actually looks like, but everything I read, and everything that comes out tells me that their loan losses will be much less than their predictions.
The thing that gets me is this. Have you seen public announcement of CFC predicting their loan losses, allowances and writedowns for the next year? Why is it that Etrade is at the forefront of all of this? Why are they the ones getting butchered? Shouldn't it be CFC that is getting butchered? Oh wait, they are. I am beginning to think that the reason ETFC is getting all this bad press is because of these other VERY large lenders are setting up a smoke screen. Now the smoke is clearing, and not that Etrade is shining, but I do think it is going to lokbetter than all of the others. Seriously, if ETFC is going to go under, I can only assume (and quite favorably), that every single large lender will fold and no one will bailout anyone, definitely leaving the entire world in a prolonged depression.
I do hear what you are saying, but I want to see proof that their current allowances are eaten up by charge-offs? Where are you getting this information? Please forward a link so I can see it. That is a pretty serious accusation, and could have enormous investor relation issues. Are you speculating, or actually speaking fact? If fact, I would really like to see it, especially when I just tripled my position at $3.65. If you are speculating, then you should say so. Speculation is very important as well, but there is a difference between speculation and fact.
OK, I have to get back to work.
User, please inform.
Thank you.
Seller, bullish on Etrade is not a bad thing. It seems like there are two distinct sides to the fence for this issue. It will be an interesting play. Will it be a tragedy? Or will it be Glory of God resurrection? Probably somewhere in between.
What a crock of crap that is!
I though etrade was one thing. (Online Broker) But then the stock tanked and I find out it is a completly different thing.(Morgage lender) I am so damn stupid.
I have no cloice but to dump more cash into etfc and hope it goes up a buck or two so I can at least break even.
Damn I'm a moron!
The whole damn market is conspiring to ruin me financially.
The whole damn market is conspiring to ruin me financially.
Good points. Since you are interested I will get you the links and detail where the evidence is, and were i am spectulating (or extrapolating) and why. This will hopoefully allow for an informed decision on the risk/reward for the stock. I have not calculated yet what the brokerage value would be (there deffinately is some) in comparison to the loan risk default potentially is because as a brokerage firm they have to miantian minimum capitailazion levels. If someone is willing to by them, absorb the risk, and liabilities maintain the brokerage, what are they willing to pay? I have not calculated a guess yet. it will take me some time to come up with a reasonable calcution, but first i will post the details of what i said an why. I hope to do so sometime this evening. Please be patient. I am not trying to say the sky is falling, or compare them with countrywide, but I think their capitilization levels pose great risk to what they may be able to. I think some of the management is aware of this risk, hence the deal where they were willing to pay 12.5% for a loan. The main question is how this is going to go in the immediate future. I will let you of what I think are the red flags on their balance sheet and why. All I ask is after I post please evaluate and let me know where you think my judgement may be off and why. Look foward to talking to you some more, And I will post later this evening.
If you are a moron for cost averaging through a downturn, well, I guess I am one too, and there are plenty more where I came from. I know a lot of people right now who wish they had more money to put into the market, a lot more money.
That'll be $500. Oooops, I forgot to tell you that I have a one hour minimum. One hundred shares of ETFC will do.
Ooops, got off track there. USER162264. Just checking to see if you might be around somewhere. I would really like to hear more from you on the topic of speculation vs. fact. Can anyone else enlighten this pumper elf?
It will be information for all of us. Bashers and elves alike!
So..., as a happy customer, I now feel pretty lucky to now be a happy shareholder. I think Peter would agree.
Thanks User.
Also, have you been following any of the discussions on other SA ETFC articles?
I sold today the batch I just bought at 3.65 for 3.94. I fear for febs report. I am going to be taking a close look at your feeback et cetera before jumping back in. I just think with new economic signals coming in tomorrow and friday as well as Feb report from ETFC there is a huge potential for craziness in ETFC's share price.
Could be hugely positive and hugely negative and probably not flat.
Looking forward to what you have.
yahoo.brand.edgar-onli...
P116 –deferred tax asset 550million
P115 list client accounts as 418 mil in assets
P114 detailed description of the “goodwill” assets. Suspect most is left over from purchase of Netbank. 2 B in goodwill not a good asset to include as a book value, technically it gets included, but real value is 0.
P108 details the increase in nonperforming loans. Can see value increased in 2007 from 2006 from 74 mil to 418 mil. If I am correct non performing loans as still included in the total balance. If they are written off, they would be included as a loss and removed from the balance sheet. Not the increase in home equity and mortgage loans. This year those numbers, by all expectations, due to the economy, will increase (double to triple)*. I give them credit for the RV loans low default rate.
Also page 108 it details the increase in loan loss provisions. It shows the increase from 67mil to 508 mil. Not it has a category for charge-offs. By my understanding, a non-performing long is not actually charged-off until it is charged-off. Notice a similarity between the amount of the non-performing loan set aside and the increase in non performing loans. Also note the amount of the set aside is not much greater than the non performing loans that are already on the books.
P107 will detail the total loans held and a breakdown by category. Here you will se that of the 30B in loans they have on the books, slightly over 20B are variable rate. If the customers are so well off, why did they get variable rate loans instead of fixed rate? A factor in my prediction of future default rates.
P84 details total shareholder equity of 2.8 B in share holder equity. The 2b in goodwill and 418mil in “client account lists” is included in this amount.
P66 details how most of their 30b in loans are greater than 5 yrs to payoff. They are long term and will take many years to get off the books.
Couple of points from the risks notes:
P10 They have 550 mil in deferred tax credits they include in the books.
P7 they expect loan losses of 1-1.5B in loan losses over the next three yrs (there Estimate)
On p61 they say if they had to currently mark to market their debts, it would result in a loss of 501 million
So what do these flags mean? I think that if they were more conservative in there balance sheet, they could easily have their current capital wiped out. The other thing is that most estimates show that value of mortgages is lower than currently shown by most companies. The problem is over the next year or two a significant percentage are going increasingly under water. This is causing foreclosure rates to rise, even in mortgages when people can afford them they just want to cut their losses and leave. People who have taken home equity loans are more likely to be in this category, and the equity loan will show the highest losses as they are paid after primary mortgages. Based on market conditions, I can easily see them losing 4Billion in their loan portfolio. You can take their word for it, but how good have they been at predicting mortgage values? Just look at their sale of 3B in loans for 30cent on the dollar. What they clearly are trying to do is postpone any hits on their portfolio for as long as possible in the hopes they can ride it out. See the py61 where they think it is a temporary condition.
While I agree that the brokerage side is highly profitable, and worth money, the problem is they have to maintain a minimum capitalization to stay in business. Can they do it? I think there are others beside me who feel that it would require additional capital or to be absorbed by an entity with enough capital that it could ride through this and continue brokerage operations. From their annual report and the consensus that mortgage conditions are getting worse, I can’t see them doing it as is.
A note on the non performing loans. They had 400 mil last year. By all accounts it will be much higher this year. I think it could easily reach 1B this year and even higher next (1.5B to 2B). I ham hoping the market will start improving the following year and would expect .5 to 1B for 2010. If you include all this in the current valuation, it is fairly easy to see how they would require several billion in additional capital. We saw how much they had to pay last time, how much will they have pay the next, if they can get it. My guess is that some company will use it has a bargaining chip to be able to buy the entire company on the cheap. How cheap is the question.
Not sure how this will come out or how easy to read it will be. PLease either post questions or email me at optiontraderdan@yahoo.
I also know the Mr. Shinnick talked about much of what you are saying. In the comments on that article there is a great discussion of the pros and cons. There is even one guy who ran a model that pointed out that eTrade's biggest concern right now is the 12.5% rate on the 1.75B.
If you are a math guy, you will appreciate the fact that this guy even ran a model.
There is also one commentor who went on a great discourse on why default rates et cetera. I think it is a good discussion.
OK, I have to get going, if you could sned me the link, that would be great. If not, I will try an sort it out with the copy on Etardes website.
Cheers
As I see it,there's no guarantee that last Q's noted improvement in the loan portfolio won't reverse.Macro trends in housing and incomes don't indicate to me any clear improvement in the mortgage holders lot,delinquencies and defaults continue to trend upward.And the Fed may be out of bullets.
I don't know how bad it might be or become but ETFC has around $40 Billion in loans that could get in some degree of trouble.
The MF seems to equate ETFC's status with TMA and others diluting their shares:
fool.com/investing...
"Whether Thornburg will be able to keep its doors open is another story. However, the massive share dilution and delayed filings leave few reasons to argue in favor of owning the company's shares. Thornburg, along with fellow leveraged share-diluters E*Trade (Nasdaq: ETFC), Ambac (NYSE: ABK), and (on a much smaller scale) Citigroup (NYSE: C), have dug their own graves.'
SA author,R. Middleton has written a comprehensive series on the crisis and other articles I highly recommend,read everything he offers if you want to temper your outlook with some intelligent caution:
seekingalpha.com/artic...
Some other cited issues are asset sales,like the Indian deal just announced. OK,they get the $145m but they lose the rev. and profit going forward and this from a co. that recently was selling themselves as an international player.
Further,they will be paying over $50 million per Q interest to Citadel ,a nasty drag on potential profits.
Exiting the mortgage origination biz. Sounds good given the aura surrounding mortgages but recall this was once probably their biggest moneymaker,now gone for the conceivable future.And let's not forget it's expensive to exit a biz line,severance packages and all that.
Debt for equity swaps. Yes,they take debt off the books,a good thing but they are dilutive to shareholders.
And speaking of dilution,keep in mind the recent authorization of 600 million shares by management.
Those pumping ETFC would have you believe that mgt. just ran out of authorized shares for routine corporate purposes like ESOPs and debt for equity swaps.Maybe, but did they need to double the existing 600 million shares,seems like they have something in mind that a more modest 1-200 million shares might not cover.
Curious!
The MF seems to equate ETFC's status with TMA and others diluting their shares:
fool.com/investing...
"Whether Thornburg will be able to keep its doors open is another story. However, the massive share dilution and delayed filings leave few reasons to argue in favor of owning the company's shares. Thornburg, along with fellow leveraged share-diluters E*Trade (Nasdaq: ETFC), Ambac (NYSE: ABK), and (on a much smaller scale) Citigroup (NYSE: C), have dug their own graves.'
At the same time,Citadel registers for "potential" sale over 90 million shares it got for lending ETFC $1.9 Billion at 12.5 % last November. It also registers this debt for "potential' sale at the same time as the share authorization. Curious!
I'm not going to pretend I know what either ETFC or Citadel is up to but unlike the pumpers I won't assume it's purely coincidental and /or innocent toward shareholders.
If nothing else it adds a huge dose of uncertainty to the equation and we know how uncertainty is treated by Wall Street.
And speaking of Citadel,FWIW,in March a hedgefund manager stated:
"The anonymous fund manager said Citadel, which did not return a call seeking comment, paid such a low price for the mortgage book, and got such favorable terms on the loan, that it would have been foolish for other hedge funds to blindly follow into the stock. After all, he said, Citadel was getting in cheap.
"Why would any bull point to Citadel?" he said. "
Frankly,mgt. is another reason I'm wary of ETFC.
Look at the facts.
Layton,according to published reports,was not the BOD first or even second choice for the job.
Layton,to my knowledge, is not known as a turnaround specialist,per se,and he did have some Enron rumors surrounding his former job,perhaps even contributing to his retirement.
To date,the pps has not improved.
Layton is very much at the mercy of KG,who I trust as far as I can throw.
Layton's heavily touted pay package would do best if he succeeds at a turnaround BUT he is getting a $1 million/year cash and will get a nice payout in the event of a buyout and I don't think there's any caveat as to buyout price.This is from memory so you might want to check the filings on that,not that momentous an issue though.
Bottom line,he hasn't been there long enough or achieved enough to rate him so he remains a question mark,IMHO.
I have more concerns but for now I think you can see my caution on ETFC as an investment is quite logical.