E*Trade Earnings Preview: Asset-Based Revenues To Drive Q1 Results

51.75
Trefis
ETFC: E*TRADE Financial logo
ETFC
E*TRADE Financial

E*Trade Financial Corporation (NASDAQ:ETFC) is scheduled to announce its Q1 2015 earnings on Thursday, April 23. The company witnessed a 3% year-on-year (y-o-y) increase in net revenues to $461 million in the December quarter, with growth coming from both net interest revenues (+10%) and trading commission revenues (+5%). Much of the growth was largely driven by an increase in trading activity and a gain in client assets complemented by a rise in yield rates. Continuing the trend from the previous quarters, E*Trade’s assets under management continued to improve through the months of January and February in Q1, while trading volumes stayed lower than  the year-ago period.

We have a $21 price estimate for E*Trade’s stock, which is significantly lower than the current market price. E*Trade’s stock price has risen by about 20% since it released its Q4’14 earnings at the end of January.

See our full analysis for E*Trade Financial

Relevant Articles
  1. Coronavirus Recovery Watch: Capital Market Portfolio: 15% 5D Return vs. (-25%) YTD Return – [BlackRock, E*TRADE, Schwab & TD Ameritrade]
  2. Why Isn’t Charles Schwab’s Stock Benefiting From The Spike In Trading Volumes?
  3. E*TRADE: Will Lower Trading Commissions Cause Revenues To Be Short Of Consensus Estimates For FY 2019
  4. Is E*TRADE Stock Fairly Priced?
  5. Net Interest Revenue Will Form 40%, 60% or 80% Of E-Trade’s Stock In 2020?
  6. Changing Business Environment Likely To Be A Boon For Schwab and Ameritrade Despite Zero Commissions

Client Asset Base Sustains Growth

E*Trade added about 146,000 net new brokerage accounts in 2014, ending the year with about 3.14 million accounts. This further increased to about 3.17 million accounts by the end of February this year. The company earns interest income through holding credit balances, which include margin, real estate and consumer loans and by holding customer cash and deposits. E*Trade’s average balances for brokerage accounts stood at $41.4 billion for the full year, up from $40.9 billion in 2013. The average balance rose to $41.2 billion for February, which was about 6% higher than the year-ago period.

The net yield on these assets rose last year, due to which revenues generated by interest on these balances grew by 11% year over year  to $1.1 billion. The implied yield on these assets was 22 basis points higher than the prior year period at 2.63%. We currently forecast the average yield for the year to be around 2.95% and resulting revenues to be 20% higher than the prior calendar year at $1.3 billion.

Sequentially Higher Trading Volumes Fall Short Of 2014 Levels

The average trades per day on E*Trade’s platform were up by almost 5% month-over-month to 173,000 trades per day in January. This further improved to  about 179,000 daily average revenue trades (DARTs) through February. [1] However, DARTs were about 11% lower than the comparable prior year period. This can be partially attributed to the surge in trade volumes in early 2014 leading to a tougher year-over-year comparison. [2] Similarly, most brokerage firms including Ameritrade (NYSE:AMTD), E*Trade and Charles Schwab (NYSE:SCHW) witnessed a year-over-year decline in trade volumes in January and February. On the other hand, E*Trade successfully added over 27,000 net new brokerage accounts through the first two months of the March quarter. We currently forecast the total number of brokerage accounts at E*Trade to increase 3.3 million by the end of 2015, and to over 4 million through the end of our forecast period.

With almost 3.2 million accounts at the brokerage, 176,000 trades per day roughly translates to about 3.5 average trades per account for the quarter. If the number of trades per day stay at current levels, it could lead the average annualized trades per account to rise to over 14 trades per account for the full year.

Margins Improve As Expenses Stay Flat

E*Trade’s operating expenses in 2014 were slightly lower than the previous year at $1.1 billion, while its operating income was up by over 100% year over year to $633 million. Since most expenses incurred by brokerages are fixed in nature, growth in net revenues directly impacts margins. According to our estimates, E*Trade’s adjusted EBITDA margin was over 40% through the year, significantly higher than the prior year levels of about 32.5%. We forecast the company-wide EBITDA margin to rise to over 43% in 2015, while we expect it to increase more gradually through the end of our forecast period.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. E*Trade Monthly Metrics For February, E*Trade Investor Relations, March 2015 []
  2. Discount brokers’ volumes rise as small investors pile into stocks, Reuters, March 2014 []