Metrics, Mortgages and Analysts
May 2008 brokerage metrics were released this past week by E*Trade (ETFC), Schwab (SCHW), and Ameritrade (AMTD). Reuters summarizes their comparative performances nicely by stating:
NEW YORK, June 18 (Reuters) - E*Trade Financial Group Inc (ETFC) on Wednesday reported its average daily trading volume rose 4.1 percent in May from a month before, slightly outperforming its rivals TD Ameritrade (AMTD) and Charles Schwab Corp (SCHW).
Average daily trading volume, a key indicator in the on-line brokerage industry, increased 10 percent from a year earlier while its retail customer assets were up 3.9 percent month over month.
But its retail customer assets were still down 15.6 percent over a year before. In November, customers fled in large numbers after E*Trade's holdings in risky mortgage securities generated big losses.
At a Sandler O'Neill conference earlier this month, E*Trade's Chief Executive Donald H. Layton said the brokerage was focusing on its main brokerage business as if there was no crisis.
E*Trade continues to outperform in the online brokerage market and for all of 2008 has strongly established that “their core business is intact.” But the mortgage portfolio problem is constantly being presented in current articles as a problem; not because recent developments or announcements from E*Trade indicate any problems exist, but because unplanned exorbitant subprime write downs are daily presented in the news from other banks and financial institutions; so the assumption is that E*Trade’s Mortgage Portfolio must be having the same issues.
This assumption that E*Trade’s Mortgage Portfolio currently has similar problems is completely contrary to the report by Donald Layton earlier this month at the Sandler O’Neill conference. Below are a couple of slides and commentary by Mr. Layton from that conference.
How is the home equity doing? It is the big item here. Interestingly enough, markets have been bad, economy has been bad, but as we show here in the first quarter, something is a little better than the usual run of the mill troubled home equity portfolio on [E*Trade’s] books.
Per Layton’s comments:
This chart shows the change in the total delinquencies, one universally regarded leading indicator for charge offs during the last several quarters … what you see usually is that there is a credit cycle where delinquencies grow rapidly, then they grow at a low rate, then they go flat, then they will decline. The first quarter was quite a surprise because it showed a very small dollar growth in the delinquencies and as a percentage (8 percent) a very low growth rate …
In addition, the leading indicator of delinquencies, even more, is the early stage delinquencies (the green line 30 to 89 day buckets) which are called special mention loans. We had a reduced growth rate in the 4th Quarter and an absolute decline in the 1st Quarter. While it is too early to claim victory, this was very positive.
Mr. Layton finished by commenting on a common question he is asked:
Why is E*Trade having a more favorable experience in regards to portfolio performance in comparison to Bank “X” and Bank “Y?”
He gave a few reasons why: 1) Early in 2007 E*Trade ceased to accept the types of “2007 vintage” loans that are resulting in higher subprime defaults. The “2007 vintage” loans are much worse than 2006 or 2005 loans and E*Trade has a lower quantity of those problematic 2007 loans; and 2) E*Trade maintained a higher FICO score requirement for loan applicants. While this has not prevented defaults, it has resulted in lower delinquencies.
In summary, the performance of E*Trade’s Mortgage Portfolio and management’s position of “full disclosure” are unusual in the current financial industry. As a result, analysts have recently responded favorably to E*Trades positive results.
On June 11, the S&P Upgraded E*Trade and specifically stated,
We think management has been straightforward in their disclosure of exposures to troubled mortgage securities and has made strides to reduce this exposure. It has also been able to attract customers and post strong trading volume despite balance sheet issues. We expect loan loss provisions and valuation adjustments will continue to weigh on results, but we think ETFC has acted in a timely manner and should be able to sustain its business.
A summary of E*Trade’s analysts, change dates, rating changes, and target prices is shown on the chart below (click to enlarge).
The most recent analyst change prior to the S&P was a Target Price revision to $6.00 per share on April 24, 2008. This target price by analyst Michael Vinciquerra from BMO Capital is significant because Mr. Vinciquerra is a 4-star accuracy ranked analyst (see here for more details on star ranking of analysts). An average of all the analyst’s target prices is $4.89.
Since late November 2007, E*Trade’s share price has been range-bound: dropping as low as $2.08, rising as high as $5.48, and sitting at around $4 for the past two months. The current $3.60 to $3.80 range is lower than in November 2007 when no one was sure whether E*Trade would survive bankruptcy.
E*Trade has done more than survive bankruptcy. April and May metrics were better than the industry averages, and their loan portfolio is actually performing better than management expectations. Unique marketing strategies, innovative brokerage tools (BlackBerry), improved brokerage metrics, and stabilizing balance sheet transactions are assurances that E*Trade’s shareholder value will continue to improve, especially with the potential continuation of favorable results in the 2nd Quarter 2008 report next month.
As stated in a prior article, many financial stocks like Lehman (LEH), Merrill Lynch (MER), UBS AG (UBS) and Citigroup (C) have just started to reveal their problems, are questioned regarding whether they are revealing the true extent of their problems, and are still figuring out what they are going to do to survive. E*Trade’s true position among them is more of a “First One In, First One Out” and moving forward with success.
Disclosure: Long ETFC
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This article has 65 comments:
- LABMAN
- 2 Comments
Jun 20 06:57 AMthe apparent turnaround.
- ZenInvestor
- 71 Comments
My Website
Jun 20 08:07 AMThe reason the 'street' does not see it is fear, and part of that is well founded since many regulated banks were able to hid portfolio issues from regulators through their sheer size and the complexity of the deals. Cindy's point about 'first in, first out' of the crises is well founded. The fact that E*Trade owned up quickly and sold the sub prime to Citadel for a deep discount has set them up to exit the credit crunch early. Q2 will be the real sign that their recovery, if not complete, is well down that road.
- Ben Williams
- 30 Comments
Jun 20 08:25 AM- theinvestingspeculator
- 133 Comments
My Website
Jun 20 09:46 AMtheinvestingspeculator...
- Wez
- 172 Comments
Jun 20 10:04 AM- prescient11
- 109 Comments
Jun 20 10:25 AMWho said Etrade is immune? Stop constructing straw men. Etrade's stock price has been destroyed because everyone assumes they will get hit very hard. So think before the next time you write, for all of us.
Speculator, your analysis is about as good as Wez's. Thanks for your self-promoting non-analysis.
- Ben Williams
- 30 Comments
Jun 20 10:39 AM- VERONICA
- 12 Comments
Jun 20 10:55 AMThanks for continuing to accumulate and present fact-based reporting of Etrade. So much of the market analysis has become "Cramerized,"... with pure opinion and sensationalism that it becomes very hard to see what ground-floor sensibility even looks like. Thanks for the clarity... you are a beacon.
Hopefully someday your "colleagues,"... in the investment community will join you in writing articles that are based in reality.
Thanks for Listening.
VERONICA
- dualist1
- 1 Comment
Jun 20 11:06 AMThe advertising spend must be significant at Etrade. Can't wait to see earnings for quarter 2!
- jbmaria
- 110 Comments
Jun 20 11:16 AMHer latest piece of puffery would have you rely on management pronouncements and analyst opinions.I can almost hear the chorus of sighs and "Uh-ohs" arising from the readers now.
Take a few minutes and look back at the pronouncements of virtually every CEO in the mortgage space for the last year or so.
After reading that endless stream of lies and half truths,why would anyone in their right mind believe a word any of them uttered?????
Then look at the BMO analyst and note how long he remained at "Outperform" on ETFC in '07. All thru the year from the mid $20's all the way down to the $4-5 level when he finally downgraded 11-30-07.
It's fair to assume this guy was OBLIVIOUS to the mortgage issues at ETFC and yet now we are asked to trust his "insight".Co... me skeptical.
- lavalyn
- 35 Comments
Jun 20 11:29 AMSeriously, Cindy, you damage your credibility by lauding this one company, all the time, never faltering like this. I'm almost convinced you are a paid pumper.
- jbmaria
- 110 Comments
Jun 20 11:34 AMNah,who'd pay her for this stuff????
- forwoodenboats
- 23 Comments
Jun 20 12:06 PMJust grab a stapler and go find yourself a few telephone poles......
- lounge707
- 25 Comments
Jun 20 12:06 PM- Wez
- 172 Comments
Jun 20 12:23 PMSorry to piss on the pumping game the two of you are up to. Looking at your comment history reveals you two as doing nothing but pitching Etrade....so much for your "insightful analysis". It's not hard to see Etrade's financials, I know they have cash, they also have a huge loan book that maybe more subject to losses than what the CEO thinks....as has been the case with every other bank. I was simply countering Cindy's constant pumping of her position in Etrade. Balanced discussion are much better than one sighted prayers that everything will be fine.
Long ETFC btw........
- lounge707
- 25 Comments
Jun 20 12:49 PMHowever when you start calling people idiots and name calling, that ain't cool. You can disagree with Cindy and others, but lets name start downing people because they do not share the same opinions with you. Lets keep this forum clean debate. State your opinions and let the readers decide what they want. PEACE!
- jimmy46
- 210 Comments
Jun 20 01:01 PM$7 for a limit order?
- anastos
- 42 Comments
Jun 20 01:13 PM- prescient11
- 109 Comments
Jun 20 01:15 PM- Ben Williams
- 30 Comments
Jun 20 01:16 PMHaving said that, I am not caugt up in the pinheads who want to rain on E-trades parade where they HAVE shown improvement, HAVE improved their capital position and have increased business. People presenting the numbers can lie, but the numbers don't. E-trade is moving in the right direction and you can post back here a year from now and see who is right and who is not. Hear me now, believe me later.
- prescient11
- 109 Comments
Jun 20 01:18 PMWe'll see won't we. I'll remember this come 1Q of '09 and we can see whose call was right.
So rather than listen to your blathering Monday morning quarterbacking about oil, etc. How about you enlighten us as to your calls that will take you to 1Q of '09 and we compare then, shall we?? I believe ETFC will yield a 200% gain by then.
We await your genius.
- Wez
- 172 Comments
Jun 20 01:23 PMThis site has a huge amount of rabid ETFC fan "boys", Cindy being one of them. I hope this stock goes higher, but reading all the desperate bullish comments about ETFC and SIRI on this site is pathetic. Just because you own a stock and want it to go higher doesn't mean you have to put the blinders on and start pumping.
- Shock
- 2 Comments
Jun 20 02:08 PM- Educated Investor
- 34 Comments
Jun 20 02:42 PMThe fact is, E*Trade's comments in June's conference are something that is not generally known to the investment public. Since that information indicates E*Trade will be able to maintain unique performance differences in comparison to the industry, I felt those comments needed more publicity. My decision to publish that information shows that I have confidence in Layton as a man of integrity; unlike other Wall Street Financial Company CEOs. His reputation and experience speak loudly, and he would not risk his reputation to mislead investors regarding E*Trade's Mortgage performance.
I have shared my "Due Diligence" in deciding that I am going to hold on to my long position in ETFC. If you don't feel the same, then sell out your position or don't bother buying the stock.
I am not a paid pumper, nor do I write any lies, unless a positive attitude is construed to be a lie. I fail to understand how my presentation of my "due diligence research" to maintain my long position in holding a stock compromises my integrity as a researcher. I am pleased with my research, pleased with this article, and pleased with my long position in E*Trade. Hope you all have a great day!
- jbmaria
- 110 Comments
Jun 20 03:29 PMNot sure why you're so enamored of Layton?
Press reports confirmed he wasn't the top choice of the BOD.
He's not a turnaround expert.
He hasn't done much for the stock price.
His policy of announcing dilutive swaps after the close on Friday's is considered slimy by many Wallstreeters.
And ,rightly or wrongly,Layton was tarnished by some involvement in the Enron debacle.
Please explain what he's done to earn your adulation.
- Educated Investor
- 34 Comments
Jun 20 05:30 PMnv.intellectspace.com/...
study the information from this link and you will see that he is very qualified to lead E*Trade through this difficult time. I have never heard his name linked to Enron so I think you are just dropping that "well known negative" out here with no reference to back it up. Give me a reference for this Enron involvement so that I can feel that you have integrity and factual basis for what you say.
- stealthflow15
- 3 Comments
Jun 20 05:58 PMhe sent an email while at jpmorgan to execs saying enron may be doing some shady stuff. they went after him like they are doing the bear sterns guys for no reason, just to find a scape goat.
he was first to realize the problems which is a testament to his expertise. i don't see it as a negative.
- jbmaria
- 110 Comments
Jun 20 06:11 PMThat's why my ID is over 10 years old and I stand behind every post even though a few of the calls over the years weren't exactly "brilliant".... that your pumper partners "numbersssss"... changes his often and the other boy wonder pres just started posting in January-wonder why? Prescient11 even admits ETFC is his first major stock holding,did you know that?
That said ,your inability to do even the most basic research on Layton is troubling. Everyone who follows the OLB space knew about Layton and Enron,as minor as it might be,only a rookie pumper like you would be in the dark about it.
A simple google would have found it.
Sad to see what passes for "expert research" on SA these days.
- jbmaria
- 110 Comments
Jun 20 06:22 PMCindy,you know I don't lie or you should.
That's why my ID is over 10 years old and I stand behind every post even though a few of the calls over the years weren't exactly "brilliant".
Note that your pumper partners "numbersssss"... changes his often and the other boy wonder pres just started posting in January-wonder why? Prescient11 even admits ETFC is his first major stock holding,did you know that?
That said ,your inability to do even the most basic research on Layton is troubling. Everyone who follows the OLB space knew about Layton and Enron,as minor as it might be,only a rookie pumper like you would be in the dark about it.
A simple google would have found it.
Sad to see what passes for "expert research" on SA these days.
- jbmaria
- 110 Comments
Jun 20 06:29 PMEven more germane,why do all the ETFC pumpers hate Bhatia,one of the few analysts who warned of the problems in August
BEFORE everyone started talking about them.
Shouldn't that make him a bit of a hero?
It does to me.
- Wez
- 172 Comments
Jun 20 08:04 PM""I AM QUEASY." Complex deals involving cash advances raised concerns with JP Morgan Vice-Chairman Donald H. Layton. "We are making disguised loans, usually buried in commodities or equities derivatives (and I'm sure in other areas)..." Layton wrote in an internal 1999 e-mail to credit-risk managers that was introduced as evidence in the trial. (Parenthetic remark in previous sentence is Layton's.) He also wrote: "I am queasy about the process."
When pressed to explain what he meant, Layton testified that his concern was with such lending practices in general, and he could not recall the controversial transactions with Mahonia. Layton would have no further comment for this article, JP Morgan said.
From the get-go, JP Morgan has insisted it followed the law in all its opaque deals with Enron. In July, under questioning from Senator Carl Levin (D-Mich.), then chairman of the Senate Permanent Subcommittee on Investigations, bank execs asserted that there was nothing improper about its Mahonia deals -- the same assertion Harrison made last week. Yet in August, under growing pressure, JP Morgan announced it was forming a committee to review its practices."
That actually gives me more confidence.
- jbmaria
- 110 Comments
Jun 20 08:18 PMLegally,he's guilty only of wondering out loud if something funny was going on.We're not holding him to the highest standards here,a real "boy scout" might have made some real noise.But I'm adult enough to know how biz works and also smart enough to think this is a small negative for a CEO running a co. I invest in.
If nothing else,it shows at least a little willingness to play ball with others to cover up shady stuff.
There was talk he retired early over this smear but how do you nail that down-you can't.
- rossetti2000
- 6 Comments
My Website
Jun 21 04:21 AMCompared to the likes of Lehman, Bear, Citibank, Bank of America, or Countrywide, Etrade sits on a small acreage of financial real estate, one that it can "till" and one that it can build upon without being overwhelmed by excipient, dilutive market conditions that might continue to destroy its core brokerage business.
Etrade is compact; it is strong, and it is ready. And if I am not mistaken, Etrade also has a 723 million dollar tax write off that it can carry back two years and forward 20 years. If that is the case, Etrade can carry back about 523 million dollars against taxes paid in 2005 and 2006, and Etrade will be left with about a 200 million dollar carry forward (check the Etrade balance sheet posted on the NASDAQ website). This tax credit may be the reason why Donald Layton mentioned that Etrade's bank would be self sufficient going forward. If my thinking is correct, 732 million dollars will provide substantial support for Etrade's turnaround effort.
Once again, thank you kindly, Cindy, and please continue to inform us concerning Etrade's future progress.
- Long time Etrade Customer
- 8 Comments
Jun 21 07:33 AM- jbmaria
- 110 Comments
Jun 21 11:07 PMPerhaps because there's only two logical conclusions,you left it out intentionally since it didn't fit your thesis (you lied by omission) or your research skills are severely absent or biased?????
Anyway,pumpers are always citing Layton's pay package being tied to performance.That's true enough but there are some other ways to look at it.
Layton's got his $1million stock buy back and plenty more with any luck at all.That buy of stock was IMHO, a down payment on the job he wanted and not a big amount to him,he earned $15 million total compensation his last year at JPM. If he hadn't been appointed CEO of ETFC he might have walked and sold his tiny stake-not much of a risk on his part.He's pretty well covered as I see it.
But below is the language from the SEC filing describing his ETFC CEO compensation:
"Mr. Layton will receive an annual base salary of $1,000,000, and the Company granted to Mr. Layton stock options and restricted stock, which will vest on a quarterly basis through 2009 and have an initial aggregate value of approximately $15.4 million (with the value for the stock options based on an option valuation methodology and for restricted stock based on the intrinsic value on the grant date). Mr. Layton and the Company will enter into an employment agreement with a term through 2009, which will provide for no further equity grants and no opportunity for any cash bonuses during the term. Under the employment agreement, if Mr. Layton is terminated without cause, or if after a change in control, he resigns for "good reason" (as defined in the Company's previously filed form of executive employment agreement), he will receive a severance payment of $5 million and accelerated vesting of his equity awards. He will not receive separate compensation as Chairman or as a director."
Is it possible that even if Layton presided over the sale of ETFC for only $1/share,he'd still get a $5m bonus and restricted shares could still be granted to him then????? That seems to be the way it reads?
- Educated Investor
- 34 Comments
Jun 21 11:25 PMWell, I read through what you and WEZ said about the 1999 Enron problem, did some research, and it seems like you are extracting some commentaries here and there; I still have looked around now and have not been able to find any conclusive link to Mr. Layton and Enron; except for some minor interactive type things that can happen in the business world. He definitely was not "IN" on anything illegal that happened there.
Now you are also