E*TRADE Financial (NASDAQ:ETFC) is expected to announce earnings for the third quarter of 2012 on Thursday, October 18. The online brokerage firm has been hit hard by a slump in investor confidence which has had an adverse effect on Daily Average Revenue Trades (DARTs). Net income in the second quarter fell by 16% compared to the same period in 2011 primarily due to a 6% year-on-year decline in DARTs during the three months. This trend continued in the third quarter as trading activity for July was down by 11% from last year with a whopping 37% year-on-year decline in August. The bottom-line for the third quarter is expected to be influenced by the tepid trading activity observed during the period.
Our price estimate for E*TRADE is $8, 10% below the current market price.
- Growth In Trading Volumes, Assets Drives Positive Start To The Year For E-Trade
- E-Trade Earnings: Strong Revenue Growth Supported By Surge In Trading Volumes
- E-Trade’s Quarterly Revenues To Be Driven By Improvement In Trading Volumes And Rate Hike
- E-Trade Reports Massive Growth In Trading Volumes And Interest Earning Assets In November
- E-Trade Year In Review: Fed’s Rate Hike Compensates For Loss In Trading Commissions
- E-Trade’s Monthly Brokerage Metrics: Trading Activity Grows Impressively In October After Remaining Subdued For Most Of The Year
Despite the fall in DARTs, E*TRADE has been successful in attracting clients to its online platform. The company lost 4,363 brokerage accounts in July, but opened 18,034 new accounts in August, ending the month with 2.9 million brokerage accounts. As the markets in the U.S. and Europe are quite volatile, more people are tempted to invest and put their money to work. Acquiring new accounts will greatly help E*TRADE as the economy improves and trade volumes pick up.
We currently forecast a steady increase in E*TRADE brokerage accounts to 3.8 million by the end of our forecast period. There is a potential upside of 10% to our price estimate should the growth rate be higher than expected, allowing E*TRADE to open around 5.5 million brokerage accounts during the same period.
What Are The Options
Although DARTs have been falling in the current year, options trades have provided some signs for optimism. In the second quarter, the volume of options trades increased by 20% year-on-year, accounting for almost a quarter of the total trades during the quarter. We expect this trend to continue as market uncertainty and prudence encourage clients to turn to options to maximize (or safeguard) their returns.
Mobile trades in the second quarter increased by 4% over 2011, accounting for 7% of the total trades executed via E*TRADE during the period. Affording greater convenience and the ability to trade on the go and keep pace with the volatile markets, mobile trades are expected to gain popularity in the future.
We currently forecast the average number of annual trades per E*TRADE account to remain suppressed through the next few years but pick up as the global macro-economic conditions improve in the long term.
E*TRADE is focusing on acquiring client assets as it is seeing a flat yield curve due to low interest rates. The company reported a 16% year-on-year increase in total customer assets, reaching $200.3 billion at the end of August. The recently introduced online program, OneStop Rollover, will allow individual investors to invest 401(k) savings from a previous employer into a professionally-managed portfolio and will allow E*TRADE to build on its $33 billion assets spread across 800,000 retirement accounts at the end of the second quarter. Notes:
- E*TRADE Introduces OneStop Rollover, a Faster, Easier Way to Rollover an Old 401(k) into a Professionally Managed Account, Press Release, 2nd October, 2012 [↩]