E-Trade Increases Expense Guidance After Investments
We don’t anticipate making a material change to our per share fair value estimate and assess shares as fairly valued.
As expected, narrow-moat E-Trade (ETFC) reported a significant decline in fourth-quarter earnings, following an industrywide move to $0 commissions on many types of online trades, as well as the drop in interest rates. The firm reported net income of $172 million, or $0.76 per diluted share, on $679 million of net revenue (which declined $88 million, or 11% sequentially, on a 9% drop in net interest income and 54% decline in commissions). Due to the company’s largely fixed-cost business, the sequential revenue decline led to a nearly 30% drop in adjusted pretax operating income (to $262 million). We don’t anticipate making a material change to our $46.50 per share fair value estimate for E-Trade and assess shares as fairly valued.
While the reset in trading commission pricing has been a near-term negative for most firms, on a partly offsetting bright note, net inflows across all of the online brokerages have increased (with E-Trade closing out the quarter with net new retail client assets of $5.8 billion compared with $2.8 billion in the third quarter and an adjusted $4 billion during the year ago period) and we've also seen an increase in trading activity (with E-Trade's daily average revenue trades increasing 21% sequentially).
Although the company has revised its expense guidance for 2020 to $1.6 billion from $1.5 billion, we view it as a reasonable shift as E-Trade looks to take advantage of any retail brokerage or advisor attrition that emerges from the pending merger of Charles Schwab and TD Ameritrade. With Schwab and TD Ameritrade expected to have a combined $5 trillion-plus in client assets once the merger is completed, for E-Trade (with around $540 billion) to capture just a fraction of the potential low-single-digit attrition that could be created by the deal could be material for the firm. We also believe E-Trade is a logical merger partner for many financial institutions and that any sale would likely take place at a premium to our fair value estimate.
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Michael Wong does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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