Low Trade Volumes Continue Through April For E*Trade

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E*TRADE Financial

E*Trade Financial (NASDAQ:ETFC) recently released its operating metrics for April, reporting a 1% sequential fall in trade volumes to 157,000 daily average revenue trades (DARTs). Moreover, E*Trade’s daily average revenue trades (DARTs) were about 8% lower than the comparable prior year period. On the other hand, the brokerage had a positive month in terms of average client asset balances, which rose by 4% annually to $46.8 billion.

In its most recent earnings, E*Trade reported a 4% year-on-year decline in net revenues to $456 million. The brokerage’s asset-based business grew by 3% year on year  to $271 million while low trading volumes led trading commissions to decline by 10% over the prior year quarter to $114 million. The account maintenance fees and services charged by the brokerage also rose by 4% to $52 million during the quarter. [1] Below we take a look at some key trading metrics through Q2’15 and our full year forecasts for E*Trade.

We have a $22 price estimate for E*Trade’s stock, which is significantly lower than the current market price. E*Trade’s market price has risen by over 20% since the beginning of this year.

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See our full analysis for E*Trade Financial

Trading Activity Continues To Be Unimpressive

E*Trade witnessed an 11% year-on-year decline in trade volumes through the March quarter to about 170,000 trades per day. However, the average trades per day were about 10% lower than the comparable prior year period, mainly because of high trading activity in the year-ago period. [2] Continuing the trend, E*Trade reported DARTs of about 157,000 through April, which was over 8% lower than volume in the comparable prior year period. The company realized a slightly higher revenue per trade in the most recent quarter compared to the year ago period. As a result, the transaction-based revenue generated by the brokerage for the quarter was down by 10% over Q1’14 to $114 million (compared to the 11% decline in trade volume).

On the other hand, E*Trade successfully added over 8,000 net new brokerage accounts during the month. The total number of brokerage accounts at E*Trade stood at 3.19 million accounts at the end of April, about 4% higher than the year-ago period. ((E*Trade Monthly Metrics For April, E*Trade Investor Relations, May 2015)) 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 3.2 million accounts at the brokerage, 160,000 trades per day roughly translates to an average of 3.2 trades per account for a quarter. If the number of trades per day stay at current levels, it could lead the average annualized trades per account to rise to about 13 trades per account for the full year.

Sustained Growth In Client Assets

E*Trade 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 client balances for brokerage accounts at the end of April were 6% higher than the year-ago period at $46.8 billion. [3] The net yield on these assets rose in 2014 for the first time in over five years, 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 23 basis points higher than the prior year period at 2.63%. We currently forecast the average yield for the year to be around 2.93% and resulting revenues to be 20% higher than the prior calendar year at $1.3 billion.

Impact On Margins

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%. Subsequently, low trade volumes (and resulting revenues) and tougher year-over-year comparisons in the March quarter led E*Trade’s adjusted EBITDA margin to decline by about 5 percentage points to 38.6% in Q1’15. We currently forecast the company-wide EBITDA margin to rise to about 43% in 2015, while we expect it to increase more gradually through the end of our forecast period.

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Notes:
  1. E*Trade Q1 2015 Earnings Call Transcript, Seeking Alpha, April 2015 []
  2. Discount brokers’ volumes rise as small investors pile into stocks, Reuters, March 2014 []
  3. E*Trade Monthly Metrics For April, E*Trade Investor Relations, May 2015 []