Jeremy Richards'  Instablog

Thursday TD Ameritrade(AMTD) disclosed of plans to sell an as yet undetermined amount of senior debt in a filing with the Securities and Exchange Commission. The company's filing lists the use of proceeds as paying down its existing senior secured term loan facilities. As of Nov. 18, the company had roughly $1.4 billion in outstanding senior borrowings, according to the filing. E*Trade(ETFC) shares pushed into positive territory after news of the filing surfaced but later sold off after remarks from analyst David Trone at Fox Pitt.

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Trone says in note to clients Thursday that a sale of ETFC's brokerage arm to AMTD would "unlock significant value."

Trone currently estimates the split-up value of ETFC to shareholders at $1.72 a share, up four cents from a prior calculation. This figure is based upon AMTD being willing to pay $4.5 billion, or $2.41 a share, for the online brokerage business -- a price Trone says represents a 20% discount to the $5.6 billion he believes the business is worth.

Trone then assumes the split-up/wind down value of ETFC's bank to be 75 cents a share, which when added to the $2.41 per share number, brings the value of the company to $3.16 per share. Subtracting estimated debt repayment of $1.44 a share ($2.7 billion) from that figure gives Trone the $1.72 a share estimate.

However, he believes a deal is unlikely "until the bank-subsidiary's credit woes are clearly behind it," possibly in mid-2010. The recent comments of ETFC brass that the firm is "'about 80% out of the problem' would seem to support our view of a mid-year 2010 sale," Trone adds.

"Bank regulators need to be comfortable that the bank subsidiary could be wound down in an orderly/profitable fashion before the broker can be sold," Trone contends in the note. "We assume AMTD is still unwilling to take both."

4 Months ago Trone said He 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.

I believe a possible deal is now just days away. I expect around a $3 offer for ETFC based on part cash and AMTD stock.

Cost savings to an AMTD bottom line of a merger make a lot of sense. ETFC CEO Donald Layton will step down at the end of the year. The poison pill is out; this makes a takeover very easy.

The question is will Charles Schwab (SCHW) step in to bid before a AMTD-ETFC wedding? I think so.

ETFC stock price has spiked last 2 days on heavy upward volume in speculation of a takeover after interested remarks from AMTD.

Key clue AMTD has $6.6B cash on hand and doesn't need to issue shares to roll over its debt of $1.4B. AMTD wants to keep as much cash on hand as it can that will be used as per AMTD for acquisitions.

Disclosure: Long ETFC.

E*Trade (ETFC) is just 3 trading days away before its earnings report. Next week will be exciting for investors. I shall be sticking by my guns and staying invested in both my own account & 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) P/S ratio is 4.93 based on trailing 12 month sales. Charles Schwab (SCHW) 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, (from earliest to most recent quarter) -0.41, -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.

September ETFC had 3 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

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.

If your posting remarks please disclose if you long or short.

Disclosure: Long ETFC,AMTD and GS.

E*TRADE Financial(ETFC) stock price is now in the $1.70 range after trading at $2.08 this week. The price drop may very well be a shake out to accumulate shares as a takeover could be in the works. ETFC had many analyst upgrades;
last week with big dog Goldman sachs(GS) raised its rating on the stock to buy with a $2.30 target and said the firm is putting its credit problems in the rearview mirror as trading revs up.
.
GS analysts last Friday suggested clients buy ETFC shares after the company reported strong client trading during August.

GS said that, despite expected rising credit losses at ETFC, which it sees increasing to up to $1.6 billion, it expects improving trends in the firm's home-equity-loan book and says the worst provisioning appears to be over for its mortgage and home-equity loans.

ETFC is now a buy say the top analysts, so if your selling under $2 and not buying you will miss out. I believe the upside is over 100% regardless of a takeover. ETFC current stock price doesn't reflect the 3 analysts upgrades last week. In my opinion, investors have a chance to buy shares cheap at the current range. 

Analysts believe a takeover is more than likely to happen. Citigroup Keith Walsh noted  last week.

ETFC main brokerage business remains healthy, with stronger growth in customer accounts than TD Ameritrade(AMTD) and Charles Schwab(SCHW), As ETFC mortgage portfolio stabilizes, the company may be acquired by one of these rivals, Walsh said.

"Competitors (AMTD) and (SCHW) have both made public comments about the attractiveness of E-Trade's 2.7 million brokerage accounts," the analyst upgraded ETFC to buy from hold and raised the price target from $1.50 to $2.30.

ETFC is gaining brokerage accounts faster than any other brokerage out there with a 138 percent increase in year-over-year new accounts. (SCHW) and (AMTD) need to hurry up and grab ETFC before this is back above $5, and I bet it will be come this time next year with its mortgage loan portfolio now stable.

ETFC sold 80.2 million shares in a so-called "at the market," or ATM, offering. This method of raising capital allows a company to sell new shares at the prices prevailing in the open market, as opposed to a secondary offering, in which the company sells stock to a group of institutional investors at an agreed-upon price, usually a discount to where the stock is trading. The New York-based online brokerage said the offering had gross proceeds of $150 million. Sandler O'Neill & Partners acted as the sole distribution agent for the offering.The average price was $1.87 a share.

Shorts will take a massive risk holding short over night. Any morning ETFC could get an offer from $3 to $4 a share or maybe more. ETFC is a now a turn around play. ETFC is well below fair value of $2.70 a share based on book value.

ETFC board of directors scrapped a Stockholder Rights Plan that was essentially a "poison pill" set up in 2001 to prevent a hostile takeover of the company.

"The Rights Plan elimination improves corporate governance, while also increasing the likelihood of the company's eventual acquisition," said Matthew Albrecht, a financials analyst at Standard & Poor's Equity Research.

Think about it? Goldman Sachs(GS) suggesting clients BUY ETFC, I bet this will soon be above the $2.30 target. Good luck and don't be tricked into selling.

Disclosure: Long ETFC,GS,AMTD

Level 3 (LVLT) poised for major broadband demand. A bullish analyst view from Mike Sapien, a principal analyst for Ovum, a telecommunications, software and IT analysis company with offices worldwide.

As a result of LVLT nine acquisitions in the last five years, the company not only supplies fiber optics network infrastructure to companies like Comcast Corp., AT&T Inc., Sprint Nextel Corp. and EarthLink Inc., but it is moving into the "enterprise" sector, which LVLT calls its Business Markets Group.

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If you waited for the opportunity to buy E*Trade (ETFC) at a discount, now is your chance and it might not last long. I expect ETFC will trend back to its 50 Day moving average of $1.55 very soon.

New purchase from ETFC Insider Weaver Donna L  bought 100,000 shares on the open market at $1.22 a share.

I noted in my prior ETFC article Analysts will soon upgrade and now they are. I expect more will also.

Matt Snowling, an analyst at Friedman Billings Ramsey, says investors should start buying shares of the company and raised his rating from Underperform to Outperform with a $2 price target based on the revised share count.

"We believe the worst is now behind ETFC, as the nearly $2 billion of fresh equity capital at the company should alleviate regulators' concerns and take the worst-case scenario off the table," Snowling writes in a note. "As a result of still strong fundamentals, good cash flow, and increased probability of becoming an acquisition candidate, we believe patient investors will be rewarded for stepping into ETFC at current levels."

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.

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E-Trade (ETFC) capital restructuring announcement is very welcome news. Although the stock sold off irrationally, the fact that ETFC's bond rallied to 98.5 reaffirms that ETFC is turning the corner.

The risk of default is significantly decreasing and ETFC is on its way to increasing capital ratios, reducing balance sheet risk, and significantly reducing its debt burden. Key points to consider regarding ETFC are as follows:

1) ETFC will reduce it's interest expense by $150 million, which is a pre-dilutive reduction of $0.26 per share. Even if ETFC offers 572 million shares (to double the existing float), there will be a reduction of $0.13 per share.

2) Loan delinquencies in the Home Equity Portfolio (loans with the greatest loss severity) decreased 11% month over month, another consecutive decline

3) Brokerage business continues to exceed expectations

I strongly believe that the stock will rally in the near-term, much as other financials who have raised capital. Examples are as follows:

Wells Fargo (NYSE: WFC)
392.15 million shares of its common stock at $22.00 per
share ($8.6B). Current $23.09

Texas Capital Bancshares, Inc. (NASDAQ: TCBI)
4 million shares priced at $13.75 ($55M). Current $14.43

Morgan Stanley (NYSE: MS)
168 million shares priced at $24 ($4B). Current price $27.48

Analysts will soon upgrade ETFC and you can bet the share price will rise significantly. I expect  ETFC will reach $4 a share by next year and on that note it would be a smart time to buy.

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