Is E*TRADE Stock Fairly Priced?

E*TRADE’s (NYSE: ETFC) stock has largely traded sideways over the year, with the stock price averaging just above $43 for the year. With all brokerages doing away with trading commissions a couple of months ago to tackle the increasing popularity of zero-commission brokerages like Robinhood, this is expected to materially impact their profits and valuation in the long run. Trefis details the key components of E*TRADE’s valuation in an interactive dashboard, along with our forecast for full-year 2019, and estimate the fair value of E*TRADE’s stock to be $43 per share – roughly 5% below the current market price.

E*TRADE’s net revenues grew roughly 7% y-o-y to $767 million in Q3 2019, largely driven by a 2.4% increase in net interest income followed by a 23% jump in total non-interest income. However, the company’s adjusted net income contracted by 3%, falling from $261 million in Q3 2018 to $254 million in Q3 2019. Net Interest income is the largest contributor to E-Trade’s top line, which is expected to face a drag from the low-interest-rate environment. Further, the company is nascent in the asset custody business with just $20 billion in custodial assets, as opposed to $250 billion and $880 billion for Ameritrade and Schwab, respectively. With Schwab and Ameritrade announcing their merger, we expect E-Trade’s top line to remain under pressure even as margin erodes over coming years.

We arrive at the stock price estimate for E*TRADE as:

Stock Price = (Total Revenue x Net Income Margin / Shares Outstanding) x P/E Multiple

Drop In Trading Commissions Will Put Pressure On E*TRADE’s Revenues For Full Year 2019

• The total revenues have increased from $1.9 billion in 2016 to $2.9 billion in 2018.
• E*TRADE has added $1 billion to its total revenues over the last 2 years, mainly driven by growth in net interest on assets.
• This includes a 29% jump in Net Interest on Assets in 2017, due to 23% growth in interest earning assets and 14 bps increase in Net Interest Yield on Loans, Deposits & Securities.
• Moving forward, we expect the revenues to drop 2% y-o-y in 2019, reducing the total figure to $2.8 billion. This would be mainly driven by 26% y-o-y decline in Trading Commissions followed by a 9% decrease in Principal Transactions, Fees and Others.

We capture the factors that have driven changes in revenues of E*TRADE’s segments over recent years along with our forecast for 2019-2020 in a separate interactive dashboard.

Lower Revenues And Higher Expected Tax Rate Would Marginally Reduce Net Income Figure

• Adjusted Net Income grew from $0.6 billion in 2016 to $1 billion in 2018, and is expected to marginally decrease in 2019 due to a slight drop in total revenues and a higher effective tax rate
• The adjusted net interest margin decreased from 28.4% in 2016 to 24.9% in 2017 – due to the impact of U.S Tax Act, before increasing to 35.4% in 2018.
• This was mainly driven by a 48% growth in total net revenues over 2016-2018, as compared to the 31% rise in total operating expenses.

This Lends Support To A $43 Price Estimate For E*TRADE’s Shares

• E*TRADE has regularly invested in share repurchases to boost shareholder returns and the trend is expected to continue in 2019.
• Lower outstanding shares should result in E*TRADE’s EPS figure increasing to $3.93 in 2019.
• Using a 10.9x P/E Multiple on expected 2019 EPS of $3.93, this works out to our price estimate of $43 For E*TRADE’s Stock.

Details about how E*TRADE’s P/E multiple compares with peers TD Ameritrade and Charles Schwab is available in our interactive dashboard.

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