E*TRADE Valuations Fell on Operating Performance, Macro Factors



Equity returns

E*TRADE Financial’s (ETFC) stock has fallen 15.6% over the past six months, backed by a strong operating performance and the deleveraging of its balance sheet. The company posted a lower adjusted net profit of $89 million in 4Q15 due to subdued trading activity in global equities and other asset classes. In the past few quarters, E*TRADE used its operating cash flows to repay its debt.

The company hasn’t paid out any dividends to its shareholders. Its peers in the brokerage industry have the following dividend yields:

  • Interactive Brokers (IBKR) has a 1.1% dividend yield.
  • TD Ameritrade (AMTD) has a 1.6% dividend yield.
  • Charles Schwab (SCHW) has a 0.74% dividend yield.

Together, these companies form 1.3% of the Financial Select Sector SPDR ETF (XLF).

However, the company repurchased 1.7 million shares of its own stock at an average price of $30.10.

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Declining valuations

Currently, E*TRADE is trading at 15.3x on a one-year forward earnings basis. Its peers in the brokerage industry are trading at a 19.1x average. Historically, the company has traded at a discount to its peers because of its high leverage.

On a current price-to-earnings basis, the company is trading at a high multiple of 33x compared to the industry average of 32x. E*TRADE has successfully attracted a significant portion of retail investors seeking financial planning and retirement solutions. The company’s customer profile gives it a reasonable expectation of consistent revenue. It’s also benefiting from E*TRADE Bank, which serves its customers by offering FDIC (Federal Deposit Insurance Corporation) insured deposit schemes.

Trading activity in the US market is expected to be subdued on global concerns. However, the volatility in commodities, Chinese equities, and European markets is expected to have some impact on domestic equities.


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