E*Trade Earnings: Are Things Finally Going to Turn Around?

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One of the leading discount brokerages, E*Trade (NASDAQ: ETFC) also provides banking services to its retail customers.  However, the company’s shareholders have not exactly felt like “leaders” over the past several years.  Since hitting an all-time (split-adjusted) high of $277.60 in 2006, E*Trade has fallen drastically, mostly during 2007-2008, and has settled in the upper single digits, currently trading at $9.86 as of this writing.  With the company set to report earnings next Thursday, investors are wondering whether or not the company can create growth and value for its shareholders going forward.

<img src="/media/images/user_14267/etrade-chart_large.png" />

E*Trade’s customers can buy and sell stocks, bonds, options, futures, and mutual funds. The customers have access to streaming quotes and charts, commentary, and margin privileges. The banking segment of the company used to be a major player in the mortgage market however decided to exit the loan origination business as a result of the mess created during the financial crisis. 

As a result of the mortgage mess, E*Trade did some restructuring and liquidation of troublesome assets. In late 2007, the company announced a $2.5 billion cash infusion, which included the sale of E*Trade’s $3 billion mortgage backed securities portfolio of $800 million, in addition to $1.7 billion in debt and equity. The company also sold its E*Trade Canada operations in 2008, freeing up over $500 million in capital. 

E*Trade is still in the process of turning itself around, however I feel it is headed on the right path. When the company reports, the numbers themselves will not be the most important part.  What will matter most to investors is the company’s outlook. Specifically, the market will want detailed plans of how E*Trade plans to return to glory and grow its earnings continuously into the future. 

While the majority of analysts predict growth ahead, it is difficult to value E*Trade due to the lack of consistent earnings numbers. The consensus calls for E*Trade to report a loss of 30 cents per share for 2012, making P/E analysis non-meaningful. Since the goal of E*Trade is to make itself into a healthy discount brokerage sooner rather than later, let’s take a quick look at how the market values two of its healthy competitors, TD Ameritrade (NYSE: AMTD) and Schwab Corp. (NYSE: SCHW).   

TD Ameritrade currently trades at 17 times TTM earnings of $1.06.  Consensus estimates call for earnings of $1.06, $1.19, and $1.41 in fiscal years 2013-2015, implying a 3-year average annual growth rate of 10.3%.  Schwab trades at 21.8 times TTM earnings, however it is expected to grow quicker. Projected earnings are $0.73, $0.86, and $1.25 for the same three years, an average annual rate of 23%, more than justifying the inflated multiple. E*Trade is forecast to post earnings of $0.53 per share in 2013 and $0.67 in 2014. If this were to prove accurate, that means that E*Trade is currently trading at 14.7 times 2014 earnings.  If the company becomes what the market considers “financially healthy,” the company would undoubtedly command a higher valuation, as financial health would mean significant earnings growth from where things stand now. 

Therefore, during the earnings call next Thursday, pay particular attention to anything the company has to say about its progress toward its ultimate goal: financial health. If progress is being made in the right direction, and the company raises guidance, it could mean a huge leg up for the stock. If progress is delayed, the bad times may become worse very quickly. Only time will tell…

KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends TD Ameritrade. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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