E*Trade Financial: Zacks’ Bull of the Day Play

E*Trade Financial (ETFCFree Report) is a financial services company and an online brokerage. It operates through two segments, Trading and Investing, and Balance Sheet Management. The Trading and Investing segment offers retail brokerage products and services, investor-focused banking products, and corporate services. The Balance Sheet Management segment manages asset allocation; loans previously originated by the company or purchased from third parties; deposits and customer payables; and credit, liquidity, and interest rate risk. The stock is the Bull of the Day after it recently became a Zacks Rank #1 (Strong Buy).

E*Trade was founded in 1982 and is based in New York, New York. Ithas a market cap of $9.5 billion with a forward PE of 19. The stock sports Zacks Style Scores of “C” in Value and “B” in Momentum. Growth is an issue for the company so the challenge is to find ways to become more profitable. The recent rise in interest rates will help.

The company sits in an industry ranked 40 out of 265 (Top 15%) of the Zacks Industry Rank. And its Sector Rank is in the top 13%, or 2 out of 16.

It’s good to be a Financial

Since the election, almost every financial stock ripped. E*Trade wasn’t left behind, with the stock going from $30 to $36 in just a couple weeks. The bullish thesis is that higher interest rates, corporate tax reform and a rollback of Dodd-Frank will allow financials to become much more profitable then they have been under the Obama Administration.

The big question is if there is more room to the upside, and for certain companies the answer is yes. Because of a recent solid earnings beat and rising estimates, E*Trade still has room higher.

Q3 Earnings

On October 20th the company reported third quarter EPS at $0.51 versus the $0.38 expected. Revenue came in at $486 million versus $468 million expected. Net new brokerage assets went to $5.4B v $2.1B year over year, while net new brokerage accounts came in at 162K v 2.2K year over year.

New CEO Karl A. Roessner had some comments on the quarter: “This quarter was transformative for E*TRADE as we completed our first acquisition in over a decade, restructured our executive team and refocused the entire organization on growth, which is our unambiguous charge. We have a handful of clear-cut objectives around which we have aligned: First, to swiftly and flawlessly integrate OptionsHouse, with a commitment to fully realize the value of the acquisition; second, to reclaim our position as a trading powerhouse while at the same time emphasizing our investing offerings; and third, to improve our marketing to more effectively engage with customers and prospects. While we have serious work to do on a very aggressive timeline, I am confident in our ability to get the job done. Separately we are maniacally focused on driving operating leverage through increased efficiency and have taken meaningful steps, reducing $21 million of annual expense, over and above all expense synergies related to the OptionsHouse acquisition. On a personal front, I am thrilled to be leading this company, which I have supported and cared so deeply about for over 15 years. E*TRADE is a fantastic franchise with tremendous opportunity and I believe we are in a strong position to continue to deliver value for our shareholders and our customers.” 

Since EPS, the stock has seen multiple analysts lifting price targets including JMP to $36, Barclays to $43, Suntrust and Duetshe to $40.

Estimate Revisions

The next couple quarters show moderate ticks up in estimates revisions. The current quarter has seen a 10% jump over the last 90 days, while next quarters has fallen. Keep in mind that the next couple quarters won’t be in a factor in what drives the stock. What will matter is the actions taken by the Trump Administration that will help the company down the road.

In anticipation of that, analyst will start taking estimates higher on the longer time frames. For now 2017 is looking pretty good, with a 4.5% tick higher over the last 90 days.

In Summary

2017 will be the year of the financials, the key is picking the right ones. Sticking with top ranked stock should help investors down a profitable road. E*Trade offers investors exposure to the increased amount of trading activity that should stem from less regulation and lower taxes. In addition, the rolling back of Dodd-Frank should make it easier and cheaper to do business.

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