danS

How Much Is E*Trade Really Worth?

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.

Citadel Does an About-Face on E*Trade

Once the write downs are finished E trade is worth AT LEAST 7 or 8 billion dollars or $2.50 a share (2.8 billion shares outstanding, including the Citadel dilution) . Citadel will gladly take this and because their convertible bonds make them essentially the majority stock holder, it will be entirely their game to call.


On Sep 02 02:37 PM Al the pal wrote:

> Just because ETrade is a penny stock doesn't mean it is a low price.
> The company doesn't have any earnings and is expected to continue
> to lose money through next year. They haven't even made a dent in
> reversing their loan losses that continue to add up every quarter
> so their ongoing brokerage business profits get swallowed up by their
> banking losses 2 to 1.
>
> There are many obstacles to a buyout.
>
> 1. The huge debt/equity ratio. Restructureing the bonds didn't erase
> the debt, only the interest payments.
>
> 2. The order flow deals with Citadel. No buyer will want them.<br/>
>
> 3. Ongoing loan losses.
>
> 4. No TARP. Inadequete bank balance sheet.
>
> 5. A retail account base that has small account balances when compared
> to their peers Schwab and Ameritrade.
>
> 6. The huge amount of dilution that has occured and is ongoing. Most
> of the bulls fail to realize that ETFC has a secondary offering ongoing
> where they can continue to dilute their equity.
>
> 7. The huge dilution factor of the converible bonds.
>
> 8. Citadel- No one wants to have them as a major shareholder because
> they are a hedge fund.

Citadel Does an About-Face on E*Trade

Expect E-trade to be over $2 in the next few months. Now that Citadel has essentially bought 2/3 of the company for a $1 a share, Layton will begin to give a more realistic and positive view of the company's future. I expect allowances for loan losses to drop an enormous amount this quarter (particularly for 1st lien mortgages) and E-trade to report a profit for the quarter. Citadel will pressure Layton to sell the company in the middle of next year. If Etrade is not sold , it will take years for Citadel to realize a return on their convertible bond investment because if they convert and cash in their bonds quickly it will put too much downward pressure on the stock price.

E*Trade: Citadel's Bonanza

Citadel is selling off its current stake in E-trade because they are planning to convert part of the convertible 1.7 billion in new bonds to stock later this year - selling part of it and possibly replenishing their holdings so they still control over 20% of E-trade stock . With approval of the new bond issue Citadel essentially will own more than 70% of E-trade. On paper however to meet OTS regulatory requirements they will never actually own more than 20% of the company

Just How Important Is GE Capital?

It's silly to analyze GE Capitals profitability without removing the effect of bad loans on their bottom line. It is my understanding that GE Capital would be nearly as profitable as it was a few years ago if it was not for the write down of bad loans. When GE is able to put the write downs behind them they will return to their earlier earnings of $2 per share, pay $1 per share annually in dividends, and will easily trade in the 25 -35 dollars per share range

Market Timing vs. Dividend Income Strategies

Typically dividend paying stocks raise their dividends about 7% a year. An income strategy for this stock is to live off the dividend (typically 3%) and sell only an amount of stock each year so that your dividend return increases with inflation. If inflation is 3% and the dividend increases 7% a year one can sell about 4% of your stock each year. Obviously if you need all of the "principle" in your investment in the near future then you are much much better in bonds.

If you view this recession as a once in a lifetime or once in a 30 year event you might want to add stocks like GE and DOW to a dividend portfolio. They are currently paying a 3% dividend but once the recession is over their dividends will most likely double very quickly as their profitability improves.


On Jul 29 07:52 AM BioBoy wrote:

> I fail to see how holding those stocks allows you to sleep at night.
> Those yields might keep up with inflation, but will generally be
> matched by the safer, more stable CD. "Daily market gyrations" might
> just be noise, but when you have multi-year gyrations of +/- 30%,
> a decades worth of dividend gains might be wiped out in a month.
> Dividend investing is certainly easy and requires little attention,
> but in reality it is a crap shoot just like all buy-and-hold investing.
> (Works great if you bought in 1945 and held for the next 60 years...
> otherwise, not so much.)

Investors Can Write Off GE Capital for the Next 5 Years

Thanks for the lively discussion. I didn't know you were doing this on your own time. If that is the case I am impressed. I guess the problem I have with GE is that their loan portfolio looks pretty good to me relative to a lot of troubled banks. That coupled with the strength of their industrial businesses makes me think of GEC's problems as essentially a one time charge off for bad loans. Their loan problems are not going to bring down the company or result in a significant dilution. Hence once the loans are charged off GE is going to be essentially where they were two or three years ago - a conglomerate with a smaller finance arm making around $2 a share.


On Jul 29 12:15 PM Wisdom vs. Information wrote:

> Dan, i think the headline is misleading, but the authors do not write
> the headline, seeking alpha does. most 'authors' on SA blog for
> fun, like me; i can not write a complete analysis when i do not get
> paid to do so, because i simply do not have time. i study my portfolio
> then write my conclusions. you adding facts is what makes SA valuable--
> everyone adds facts, and a fuzzy picture becomes clearer.
> in this environment, Immelt cannot get away with lieing politically,
> so when he says CRE and Eastern Europe will not effect cash flow
> i believe him; furthermore, CRE is well-secured. how much stimulus
> this year? if GE makes a 10% profit on 10% of $180B, that's $0.17EPS,
> or $2 at 12 PEx, conservatively; then, you get hammered with the
> UK RE, lose a couple $B cash flow 1H10... do you want to ride that
> roller coaster? my best guess is that if UK RE stabilizes, buy; if
> it does not stabilize, then there will be some hysterical selling
> 1H10 as UK RE bottoms and that will be the best time to buy; of course,
> a quick US macro recovery will render this meaningless.
> My main point was that for long run visibility right now, I am focusing
> on Energy and Technology Infrastructure. Dan, I hope you will make
> this a better place by continuing to add comments despite the amateur
> analyses.

Investors Can Write Off GE Capital for the Next 5 Years

The headline of your article is that GEC will not be profitable for 5 years, yet you don't back up the headline with hard numbers. Barlclays estimates GEC will write down 20 to 40 billion in the next two years. I'm on the fence with this stock. I'd like to see one of you guys on seeking alpha do a detailed financial analysis of it. You have given the most detailed analysis I have seen so far but it is still quite weak. All I get from most writers is how Inmelt is a jerk because he reneged on the dividend, real estate is down so that anyone who holds any real estate must be on the verge of bankruptcy and all financials are suspect because it is hard to read their financial statements.


On Jul 29 10:46 AM Wisdom vs. Information wrote:

> You are correct, I just do not care to start counting those chickens
> yet. I am averaging PV: lose a lot of money next year, make it back
> years three through five. IMO this is the rational approach because
> of the drag on margins by CRE; of course, that viewpoint will change.
> I am bullish GE and any profit at GEC will be a bonus.

Investors Can Write Off GE Capital for the Next 5 Years

You lay out quite well their prospects that GEC will not make any money for the next 2 years and then without any hard data extrapolate this to 5 years. What are their total write downs going to have to be for GEC to not return a profit for 5 years. I'm guessing a total of at least 100 billion dollars.

Debunking Ortel's GE Short Case

Nice analysis. However you have to factor in uncertainty in the regulatory environment. Is GEC going to be forced to become a bank holding company ( most likely) and is GE going to be forced split off the GEC organization (fairly doubtful). Uncertainty concerning these two issues I believe are causing the market to discount the price of the stock and will prevent it from reaching the $17 stock price you discuss. If the latter occurs I think the drop in price is warranted. However if the former occurs I don't think it will have much of an effect on GE's long term performance and you can expect the price to reach the low 20's in the next 2 years.

E*Trade: Living on Borrowed Time?

With the completion of the debt exchange Citadel will essentially own E-trade. E-trade will weather the storm in the next year or two with further debt exchanges if necessary. Once they put the mortgage fiasco behind them they will be a brokerage firm which will earn approximately 500 million annually (which is what they now earn before mortgage debt write offs)and command a market cap of about 7 to 10 billion dollars.

The risk to investors is how many shares of E-trade there will be once the storm clears. With the current debt exchange the number of share will rise to as much as 2.5 billion which yields a share price of 3 to 4 dollars with the above market cap.

How Obama's New Financial Rules Might Bite GE

Can't you calculate what the Tier 1 ratio would be if it is a standard bank based on their current financial statements? Seems like it would be a straight forward calculation.

Schwab Interested in E*Trade: Is E*Trade Interested in Schwab?

You wrote:
"Other alternative would be to sell a part of mortgages in exchange for current debt."

How much do you think they could get for the mortgages? I'm really wondering if the office of thrift services is mad that they already haven't done this. It may be a profitable move that Citadel is blocking. They are paying $275 million a year in interest to Citadel (12.5% interest on 2.25 billion in debt). The question I have is would they lose more than $275 million dollars in annual revenue if they sold enough of their mortgage portfolio to pay off the Citadel debt

E*Trade: Why the Strange Earnings Report?

Hirendu -

They do need equity to please the bank regulators. It doesn't really matter how they spin the numbers they are going to need the money either this quarter or the next. However this is the worst time to be looking for equity in the marketplace. If the stock is at $3 a share Layton may feel it is overvalued considering their circumstances and at a price that makes getting equity at a dilution acceptable to stockholders impossible. I think the Citadel offer may be the best one they can get. Remember they have a $2 billion dollar investment in Etrade they need to protect.

E*Trade: Why the Strange Earnings Report?

Hirendu -

They do need equity to please the bank regulators. It doesn't really matter how they spin the numbers they are going to need the money either this quarter or the next. However this is the worst time to be looking for equity in the marketplace. If the stock is at $3 a share Layton may feel it is overvalued considering their circumstances and at a price that makes getting equity at a dilution acceptable to stockholders impossible. I think the Citadel offer may be the best one they can get. Remember they have a $2 billion dollar investment in Etrade they need to protect.