E-Trade Sells Kobren, Focuses on Brokerage Business

E-Trade (NASDAQ:ETFC) recently announced its plans to sell off Kobren Insight Management, an investment advisor it acquired in 2005, to Adviser Investments as part of its efforts to focus on its core brokerage business. ^[1] The terms of the sale have not been made public. E-Trade competes with firms like Charles Schwab Corporation (NYSE:SCHW), Ameritrade (NYSE:AMTD), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC). We have a $18.14 price estimate for the company’s stock, a premium of about 13% to the market price.

So what exactly did Kobren mean to E-Trade?

Kobren has about $1 billion in assets under management, and is a team of about 20 individuals. These would complement Adviser Investments $1.3 billion in assets. The most direct impact for E-Trade is the $1 billion reduction in the value of its interest-earning assets for the undisclosed sum it received. Starting in 2005 the firm expanded into buying investment advisory (RIA) businesses that would use E-Trade and other online brokerages as custodians. This led to some financial instability across the industry during the financial crisis when the values of mortgages under custody dropped.

E-Trade’s interest earning assets include loans, cash and cash equivalents, margin receivables, available-for-sale investment securities, available-for-sale mortgage-backed securities and trading securities. All these assets are obtained by E-Trade from its customers – most of them active users of its trading services.

It has been a tough year for E-Trade

E-Trade reported total revenues of $2.1 billion for 2010, which was slight below last year’s revenues of $2.2 billion. With the global economic downturn taking its toll on E-Trade and others, the company has looked for ways to retain clients and grow its business.

Recently we discussed some issues E-Trade and others were facing in the online brokerage industry ^[2] The fact that the company’s Daily Average Revenue Trades (DARTs) has reduced by more than 15% in 2010, from 179,000 in 2009 to 151,000 in 2010, is a source of concern for some investors. Moreover, its net additions of brokerages accounts of 54,000 new brokerage accounts were slightly behind the 114,000 new accounts the previous year.

To understand how a change in the number of brokerage accounts would affect E-Trade’s stock price, you can change the estimates in the graph below. Do note that this only considers the change in trading commissions for the company.

Although trading commissions contribute less than 20% of E-Trade’s value based on our analysis model, we note that if E-Trade lost accounts, this would directly affect its most valuable source of revenue – the interest it earns on the assets held by it. This contributes to more than two-thirds of the companies value.

See our full analysis of E-Trade.

1. E*Trade sells wealth unit to Adviser Investments, Reuters, March 21 2011 [↩]
2. See E-Trade falling behind in the race among online brokerages. [↩]