After a robust performance in the first three quarters, E*Trade Financial (NASDAQ: ETFC) sustained its growth trend in Q4 despite missing the consensus revenue estimate. The company’s revenue came in at $735 million (+15% year-on-year). In line with our expectations, interest earning assets continued to be the primary growth driver, aided by higher interest yields due to a more favorable interest rate environment. Despite the price cut in equity trading commissions, overall trading commissions grew by nearly 13% y-o-y to $123 million, largely due to multiple acquisitions boosting trading volumes. Operating expenses grew nearly 5% in comparison to the prior year, due to higher advertising, compensation and infrastructure spending to cater to the expanding customer base, and we expect them to remain around the same levels this year. Despite that, the company’s adjusted operating margin came in at 50%, 3 percentage points above the prior year quarter. We expect this growth to spill over into 2019, driven by the expectation of further interest rate hikes in the year ahead – though there is some uncertainty surrounding that – and with the acquisitions of TCA and 1 million Capital One brokerage accounts, which should boost trading volumes.
Our price estimate for E-Trade’s stock stands at $62, which is significantly higher than the current market price. We are in the process of updating our model to account for the company’s FY’18 results. We have also created an interactive dashboard which outlines what to expect from ETFC in 2019. You can modify the key value drivers to see how they impact the company’s revenues and bottom line. Below we discuss some of the key factors that are likely to impact the brokerage’s earnings.
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Growth In Interest Revenue
Interest earning assets account for nearly 66% of E-Trade’s revenues. The company has the highest yield on assets (around 3.2%) relative to its primary competitors, which has contributed to impressive growth in revenue. These assets saw nearly 15% growth along with a 28 basis point increase in yield, resulting in more than 15% growth in the segment’s revenues for the quarter. While the magnitude and frequency of further rate hikes in the year ahead are in some doubt of late, we expect the growth momentum to sustain through 2019, albeit at a slower pace. As a result of the continued momentum, we expect E-Trade’s revenues from interest-earning assets to grow by nearly 6% to slightly over $1.9 billion in 2019.
Transaction-based revenues account for slightly over 17% of E-Trade’s overall revenue. Throughout 2018, the segment has seen steady growth in its trading volumes owing to its acquisition of OptionsHouse and TCA. As a result, the brokerage saw nearly 25% year-over-year growth in trading volumes for Q4 – partly attributable to its recent acquisition of TCA. We expect a significant jump in trading volumes and brokerage accounts in the near term owing to the TCA acquisition. In addition, increased stock market volatility, coupled with improvement in U.S. macroeconomic conditions and the aforementioned acquisitions, should result in increased near-term trading volumes. As a result, we expect the trading commissions to improve by nearly 7% to about $535 million in 2019.