E*TRADE: Will Lower Trading Commissions Cause Revenues To Be Short Of Consensus Estimates For FY 2019?

E*TRADE (NASDAQ: ETFC) will release its Q4 and full-year 2019 results on Thursday, January 23. Trefis details expectations from the brokerage giant in an interactive dashboard, parts of which we highlight below. We believe that E*TRADE will meet FY19 earnings expectations despite missing on revenues. We believe that E*TRADE’s revenues would have decreased to $2.8 billion – slightly lower than the consensus estimate of $2.9 billion, primarily due to lower trading commissions and negative growth in principal transactions, fees & other revenues. On the other hand, the EPS figure would improve to $3.93 due to a combination of lower expenses and a steady decrease in shares outstanding, which would be higher than the consensus earnings estimate of $3.89. Further, we believe that weaker-than-expected revenues for FY 2019 would overshadow the earnings beat, resulting in a slight negative movement in the E*TRADE’s stock price once earnings are announced. Our forecast indicates that E*TRADE’s valuation is $43 a share, which is roughly 10% below its current price.

Trefis shines the spotlight on key assumptions and data for E*TRADE, and our hypothesis lays out one possible set of expectations. You can chime in with your expectations for E*TRADE’s FY19 earnings in our interactive dashboard.

(1) E*TRADE’s revenue would have decreased by 2.2% from $2.9 billion in 2018 to $2.8 billion in 2019; slightly below consensus estimates

• Trefis estimates E*TRADE’s 2019 revenues to be $2.8 billion, 3% below the consensus estimate of $2.9 billion.
• Although E-Trade’s Net Revenues have grown at an average annual rate of 21.7% from $1.9 billion in 2016 to $2.9 billion in 2018, revenues are expected to decrease by 2.2% in 2019 to around $2.8 billion.
• This drop would be due to lower trading commissions and negative growth in principal transactions, fees & other revenues, partially offset by 6% growth in net interest on assets.
• Net interest on assets would benefit from slight growth in net interest margin, however, we expect the short-term rates to decline in the subsequent year.
• On the other hand, increased competition in the industry has forced all incumbents to bundle products and services for free with their brokerage accounts – driving down the total figure for principal transactions, fees & other revenues.
• Further, E*TRADE has done away with the trading commissions to compete with the zero-commission brokerage firms like Robinhood.
• Notably, we expect net revenues to shrink by 13% (about $367 million) in 2020, primarily due to the elimination of Trading Commissions.

Our interactive dashboard analysis, ‘E*TRADE Revenues: How Does E*TRADE Make Money?’, provides an interactive, in-depth view of the company’s revenues along with our forecasts and a comparison of trends with peers Charles Schwab and TD Ameritrade.

(2) EPS is expected to increase by 1% from $3.88 in 2018 to $3.93 in 2019, which would beat consensus estimates

• We expect E*TRADE’s 2019 earnings per share to be $3.93 per Trefis analysis, 1% more than the consensus estimate of $3.89 per share.
• Slightly lower Expenses coupled with a steady reduction in Shares Outstanding will drive EPS growth despite an expected drop in Total Revenues by 2.2%.
• As we forecast E*TRADE’s Revenues to decline at a faster rate than Expenses in 2019 (-2.2% vs. -1.5%), this will result in a 44 bps reduction in E*TRADE’s Net Income Margin figure from 35.4% in 2018 to 34.9% in 2019.
• For 2020, we believe that a lower revenue growth coupled with a slightly higher reduction in expenses will result in the net income margin figure rising to 35.3%.

(3) Stock price estimate ~10% lower than the market price

• A trailing P/E multiple of 10.9x looks appropriate for E*TRADE’s stock, as opposed to the current implied P/E multiple of 12.0x
• Trefis’ forecast for E*TRADE’s 2019 earnings is slightly higher than the market estimates, although the P/E multiple is lagging. This works out to a fair value of $43 for E*TRADE’s stock as opposed to the current market price around $47.

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