E*TRADE Financial (NASDAQ:ETFC) is scheduled to report earnings for the second fiscal quarter of 2012 on Thursday, July 19. Like other online brokerage firms, Charles Schwab (NYSE:SCHW) and Ameritrade (NYSE:AMTD), the company’s trading volumes are expected to suffer from the uncertainty prevalent in the markets. With interest rates set to remain low, E*TRADE is likely to focus on consolidating client assets to withstand the volatile environment. We discuss below a few trends that might influence the company’s performance.
The Game Of DARTs
- Interest Earning Assets Propelled Revenue Growth For E-Trade in Q3
- E-Trade Q3 Earnings To Grow On The Back Of Interest Earning Assets
- E-Trade’s Trading Activity Slows Down In August In Comparison To Previous Year’s Surge
- E-Trade’s Monthly Brokerage Metrics: Sustained Growth Momentum In Customer Assets In July
- How Will The OptionsHouse Acquisition Impact E-Trade’s Trading Volumes?
- Net Interest Income Growth Drives E-Trade’s Profitable Quarter
The sluggish economic recovery in the U.S. and the sovereign debt crisis in Europe have influenced investor confidence as Daily Average Revenue Trades (DARTs), reported by E*TRADE in its monthly activity report, fell 5% year-on-year in May.  Although the first quarter showed optimistic signs with strong customer metrics and a 12% year-on-year increase in DARTs, we expect trade volumes to remain low as uncertainty reigns over Europe, leading investors to remain cautious. 
E*TRADE derives 21% of its value from trading commissions, according to our analysis.
The Federal Open Market Committee’s indication that short-term interest rates will likely be kept near zero till at least 2015  is a worrying sign for E*TRADE, as net interest yield on investments such as loans, deposits & securities account for 63% of its stock price. To compensate, the company is looking to consolidate its client assets under management. Brokerage assets grew 11% year-on-year in the first quarter to an all-time record of $4 billion.
Lucrative offerings such as the 40 new exchange traded funds (ETFs) termed All-Star ETFs managed by E*TRADE are likely to push this number even higher. These funds are selected by the company on criteria such as expense ratio, liquidity, style purity, underlying holdings, and how well it represents the index it seeks to replicate.  ETFs have been the rage for investors since the turn of the century and are gaining more popularity among private equity investors as they combine the valuation of a mutual fund with the tradability of a close-ended fund while offering greater cost benefits, tax efficiency and higher transparency. 
We forecast a steady increase in E*TRADE’s interest earnings assets over the new few years.
Our price estimate for E*TRADE is $9, which is 15% above the current market price for the stock, and you can gauge the effect of a change in the forecasts by modifying the charts above.Notes:
- Schwab Reports Y/Y Jump in DARTs, Zacks Equity Research, 18th June, 2012 [↩]
- E*TRADE Financial’s CEO Discusses Q1 2012 Results – Earnings Call Transcript, Seeking Alpha, 19th April, 2012 [↩]
- Forecasts Hint Fed Might Change Rate Guidance, Wall Street Journal, 26th June, 2012 [↩]
- E-Trade All Star ETFs: A Myriad Of Low Cost And Popular Funds For Portfolio Building, Seeking Alpha, 28th June, 2012 [↩]
- The Charles Schwab Corporation : Private equity firms target ETF portfolio managers, 4-traders, 13th July, 2012 [↩]