E Trade Financial (ETFC), is a financial services company that focuses on providing brokerage and related products to individual investors, which includes investor focused banking products such as sweep deposits and savings products.
E Trade seeks to differentiate itself from competitors by emphasizing value beyond just price through its digital and technology-intensive distribution channels.
E Trade’s business strategy is twofold:
- Accelerate growth of the brokerage business through enhancing E Trade’s digital experience, leveraging corporate services offerings and maximizing deposits through E Trade bank.
- Continued strengthening of financial and franchise positions through the managing down of the legacy loan portfolio, bolstering overall capital position through increased earnings, investing in lower-risk assets and building best-in-class risk management capabilities. The overall goal of this component of the strategy is to distribute capital from the bank to the parent.
E Trade seeks to achieve this strategy by leveraging its leading technology platform to enhance its competitive position and deploy innovative product development and delivery methods. E Trade breaks its products into two segments: trading and investing (including corporate services) and balance sheet management. Corporate services include the Equity Edge software platform that manages equity compensation plans for corporate customers.
E Trade’s market making activities were sold in February 2014. The balance sheet business segment seeks to maximize the value of customer deposits through asset allocation and managing credit, liquidity and interest rate risks.
ETFC – Earnings Summary
E Trade’s business strategy is benefiting from America’s increasing interest in the equity markets as they search for yield in a zero interest-rate market environment. E Trade started the year off strong by reporting a fourth-quarter 2013 profit of $58 million on revenues of $447 million, compared to a loss for the same period last year. The trend continued into the first quarter where E Trade posted a profit of $97 million, up from $35 million the previous year, and revenues of $475 million, up 13% with both numbers beating analyst estimates.
E Trade’s second quarter beat analyst estimates by a penny, reporting profits of $69 million, compared to a loss of $54 million due to an impairment charge related to the sale of E Trade’s market making business, on revenues of $438 million, down slightly from the year prior by 0.5%. E Trade reported that trading activity had begun to moderate in the quarter placing a greater focus on the need to increase asset-based revenue.
ETFC – Stock Analysis
E Trade’s stock has shown a consistent upward trend since June and is currently up about 12% against the S&P 500‘s 6%. Unlike an investment manager, E Trade’s revenue is highly depended upon transaction volume and although higher equity markets and an overall increase in macro-economic activity will bode well for E Trade going into 2015 the company also faces stiff competition from companies like Scottrade or Interactive Brokers (IBKR).
At the end of the day, there is very little difference between the technology offerings of the discount on-line brokerages. This makes the decision for new customers to sign-on to any one of them based more on commission-per-trade than anything else.
Analyst consensus, next-quarter’s earnings estimates have come down slightly from last month to $11.03 from $1.02. With 12-month consensus price target of $24, there is not much room for share price to go, and E Trade does not offer a dividend. E Trade currently trades at price-to-earnings of 21.6 to 2014 estimated earnings and with an expected growth rate of only 12% for 2015 compared to a 2014 growth rate of almost 46%, the stock has a price/earnings-to-growth of .86, not bad but not great.
E Trade stock looks very attractive to momentum investors. E Trade has posted a string of great earnings and has the ability to do so in the future, but being a value investor, ETFC stock will need to continue to perform in a price-sensitive competitive market in order to holds its value. Markets are fickle and with E Trade’s earnings heavily reliant on trading activity it makes sense to sit on the sidelines for this one.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
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