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What’s behind E*TRADE’s Lower Valuations?

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Nov. 20 2020, Updated 1:38 p.m. ET

Lower PE ratio

E*TRADE Financial Corporation’s (ETFC) price-to-earnings ratio stood at ~16.0x on a next-12-months (or NTM) basis. An average of the company’s peers stood at ~23.2x, representing ETFC’s lower valuations.

Among E*TRADE’s peers (XLF), Charles Schwab (SCHW), TD Ameritrade (AMTD), and Interactive Brokers Group (IBKR) have NTM price-to-earnings ratios of 21.6x, ~17.2x, and ~30.8x, respectively.

Due to the new US tax law, E*TRADE incurred additional tax costs of $58.0 million in 4Q17, which could be the primary reason for its lower valuations.

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Recent acquisition, price target

On January 25, 2018, E*TRADE Financial (EFTC) announced that it acquired more than 1 million retail brokerage accounts from Capital One Financial Corporation (COF) for $170.0 million. This acquisition could help E*TRADE recover from its lower valuations. These accounts have customer assets of $18.0 billion.

At the end of 2017, these accounts had customer cash and customer margin balances of $1.9 billion and $0.2 billion, respectively. According to E*TRADE’s management, this acquisition could help E*TRADE enhance its reach to US households.

The company expects to complete this acquisition by 3Q18. Following the completion of this acquisition, new customers would be eligible to access E*TRADE’s services and products. The company plans to utilize corporate cash to execute the acquisition.

Wall Street analysts gave a one-year target on E*TRADE Financial of $62.25, reflecting an ~18.1% increase from the current price of $52.70.

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