E*TRADE Set For $9 Despite Weaker Trade Volumes

ETFC: E*TRADE Financial logo
E*TRADE Financial

A continuing decline in investor confidence took a toll on E*TRADE Financial’s (NASDAQ:ETFC) earnings for the second quarter of 2012. [1] The online brokerage firm reported a 16% year-on-year drop in net income from $47.1 million to $39.5 million. Trading volumes were dampened by market uncertainty over the economic environment in the U.S. and Europe as Daily Average Revenue Trades (DARTs) fell 6% from the prior year period to 139,000. The company, along with industry peers Charles Schwab (NYSE:SCHW) and Ameritrade (NYSE:AMTD), is focusing on consolidating client assets under management as it seeks to wade through the low interest rate period. We discuss below a few trends that have influenced our valuation of E*TRADE’s stock.

See Our Full Analysis for E*TRADE Financial

Some Positive Signs

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Although the decline in DART’s hurt the company’s performance, there were a few signs for optimism. Options trades, which account for 24% of the overall trade volume, increased 20% over the last year as investors turned to high return derivatives over equities in the volatile market conditions. Also encouraging was the growth in the number of trades executed through E*TRADE mobile, which increased 4% from the prior year period. More than half of these trades were through the brokerage’s iPhone application.

Mobile trades are expected to set the trend in the future as they allow investors to make knowledgeable decisions on-the-go while keeping pace with the volatile market. Although still in the nascent phase, trades executed through mobile phones have grown at a steady pace and already account for 7% of E*TRADE’s overall DARTs. We expect trading volumes to recover gradually over the next few years as market conditions improve and investors adapt to technological advances. Trading commissions account for 22% of the company’s value, according to our analysis.

Brokerage Accounts Grow At Healthy Pace

Despite the fall in trading volumes, E*TRADE continues to attract clients at a healthy pace. Around 46,000 new brokerage accounts were added last quarter, taking the total for the first half of the year to 92,000 new accounts. The company is well on its way to surpass 99,000 new accounts that were added in 2011, which was a huge jump from 54,000 added in 2010. The account attrition rate fell to an all-time franchise low of 8.4%. With an enhanced pallet of offerings such as Trading Ladder and Strategy Scanner that provide customers real-time streaming alerts and market information, E*TRADE’s brokerage accounts managed are set to increase steadily over the next few years.

A Period Of Consolidation

Facing a dampened yield curve due to low interest rates, E*TRADE continues to add client assets under management. The company ended the last quarter with $193 billion in total assets, adding $2.2 billion in net new brokerage assets during the period.

Retirement assets account for a huge chunk of the total assets managed, with over $33 billion spread across 800,000 accounts. With the growing concern for post-retirement financial well-being observed in the U.S., these assets are likely to grow at a healthy pace. E*TRADE has undertaken several concentrated efforts to build its brand, including a broad spectrum of educational activities to spread awareness and guide clients in their investments. The company participated in over 300,000 interactive educational sessions in the last quarter. We expect the client assets under management to continue to increase over our forecast period.

Our price estimate for E*TRADE is $9, which is 15% above the current market price, and you can gauge the effect of a change in the forecasts by modifying the charts above.

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  1. E*TRADE Financial Management Discusses Q2 2012 Results – Earnings Call Transcript, Seeking Alpha, 19th July 2012 []