E*TRADE Financial (NASDAQ:ETFC) has had a pretty rough time over the last few years. The stock has dropped substantially since the onset of the economic crisis in 2008. The brokerage business has been severely affected by the uncertain environment, which has taken its toll on investor confidence. The company recently announced earnings for the second quarter during which it observed a 16% year-on-year drop in net income. The firm’s inconsistent performance contributed to the abrupt dismissal of Chief Executive Steven Freiberg.  We look below at a few key metrics that need to be addressed by the new CEO in order to turn the business around. Our revised price estimate for E*TRADE is $8, about 5% below the current market price.
See Our Full Analysis for E*TRADE Financial
- Low Volumes, Yields Weigh On E-Trade’s Q4 Results
- Trade Volumes, Limited Growth In Asset Base To Weigh On E*Trade’s Earnings
- Trade Volumes Remain Muted in November For E*Trade Financial
- E*Trade Experiences Mixed Trade Volumes in October
- E*Trade Q3 Results: Limited Revenue Capture From Trades, Low Yields Hinder Growth
- E*Trade Earnings Preview: Trade Volumes Rise In Q3 After A Slow First Half
Interest income from loans, deposits and securities is vital to E*Trade’s operations, accounting for 65% of our price estimate. Yields from various investments have been dampened in the low-interest rate environment. This trend might be set to continue as the Federal Open Market Committee has recently indicated that interest rates will likely be kept near zero through at least 2014. 
While facing a low yield curve, the company is focusing on consolidating client assets under management. E*Trade added $2.2 billion new brokerage assets added during the last quarter, reaching a total of $193 billion in total assets.
Retirement assets account for a huge chunk of the total assets managed, with over $33 billion spread across 800,000 accounts. With a growing concern for post-retirement financial well-being in the U.S., we expect assets to grow at a steady pace through the next few years.
Trade Volumes Down But Not Out
As Europe goes through a transitional phase and concerns are raised about the future of the U.S. economy, investor confidence has dropped notably. As a result, Daily Average Revenue Trades (DARTs) have taken a hit. The number fell 6% in the most recent quarter to 139,000. E*Trade has taken initiatives to promote trading, especially through its mobile applications. The number of trades executed through E*TRADE mobile increased 4% from the prior year and provide some signs of optimism for the company. Mobile trading is expected to gain popularity as it allows investors to keep pace with the capricious market while making decisions on the go. We expect a gradual recovery in trading volumes in the next few years.
E*Trade continues to attract clients at a healthy rate. The company has added 92,000 new brokerage accounts in the first half of 2012 and is well on its way to surpassing the figure of 99,000 accounts added last year. We forecast brokerage accounts managed to increase steadily through the next few years as the company enhances its pallet of offerings. However, we believe that the company’s suppressed near-term yields and much-maligned mortgage portfolio will offset the increase in client assets and as a result the stock is currently overvalued. We believe the discrepancy between our price estimate and the market price is partially driven by the boost the stock got following the CEO change, which we do not expect to have a material impact on the company’s fundamental value. The wild card here, of course, is the possibility of renewed buyout talks. The company has been the subject of takeover rumors in the past and the leadership change could breathe new life into those rumors. The stock could certainly see upside should a potential acquirer show interest. Absent an acquisition or a significant change in strategic direction, we believe the stock has rallied past its fair value.
You can gauge the effect of a change in forecasts by modifying the charts above.Notes:
- E*TRADE Board of Directors Appoints Chairman Frank J. Petrilli Interim Chief Executive Officer, Press Release, 9th August, 2012 [↩]
- Forecasts Hint Fed Might Change Rate Guidance, Wall Street Journal, 26th June, 2012 [↩]