Most sell-siders have taken a glass half-empty approach to E*Trade's (ETFC - commentary - Cramer's Take) earnings from last night, reiterating their sell ratings and generally saying that the return to profitability will not happen this year or next.
I am going to take the opposite tack from what most of the fearleaders have taken and here are my reasons:
Client attrition was not as bad as feared, although the company did lose some of its higher-valued accounts. About 16,750 accounts with an average of $236,000 were lost. Client assets are still a strong $33 billion.
Management indicated that most of the client loss happened in the first two weeks of November, and already, the company was beginning to see signs of customers returning.
Management indicated that there could an additional $400 million to $600 million in provision expenses in 2008, which, at the high end, would give us breakeven results for the year in terms of earnings. The company has a $12 billion home equity portfolio and the expected chargebacks seem in line with what the other banks are doing.
The company reported Tier 1 and risk-based capital of 6.2% and 11.1%, respectively, both above the well-capitalized threshold of 5% and 10%.
Daily average revenue trades were up 10% in the quarter, with the U.S. up 11% and international up 6%.
There is still the possibility of an acquisition.
On the flip-side, however, there are some negatives:
The losses on its home equity portfolio bigger were than expected.
Weaker-than-expected global economic conditions led to less trading due to volatile movements in global markets.
Declines in the equity markets led to lower daily average revenue trades.
Based on the above pros and cons, at current prices, I think the risk-reward favors a long-term investment in E*Trade at current levels.
ETFC Preview: Open to Acquisition Talks?
E*Trade (ETFC - commentary - Cramer's Take), the troubled online broker, will report its earnings after the close of trading today.
The Street expects the company to lose $2.19 per share on a revenue loss of $1.1 billion due to the massive subprime-related losses it is expected to take. For the March quarter, current consensus is for earnings of a penny per share on revenue of $449 million. For fiscal 2008, current Street consensus is for earnings of 11 cents per share on revenue of $1.92 billion.
I think that the Street has taken a bottom-of-the-barrel approach to E*Trade given the fact that, based on recent data, it appears that the company has stabilized its customers' losses and still holds customer assets worth more than $190 billion. The company's home equity holdings were down to $12 billion after it sold $3 billion worth of mortgage-backed securities and munis for a loss of less than $10 million.
E*Trade has stated that it expects tier 1 and risk-based capital to be at 5.9% and 11.1%, respectively, at year-end, which is comfortably above the well-capitalized threshold levels of 5% and 10%.
Here is what to watch/listen for:
How much of the company's subprime holdings were written off in the fourth quarter?
How much does it still have on the books?
What is the quality of the subprime loans that E*Trade is carrying on the books, and what does the company expect to get for them?
Any acquisition comments will be key.
Pay close attention to EPS guidance. The Street is all over the place for 2008, with a low estimate calling for a loss of 61 cents per share to a high of earnings at 63 cents per share. What will the company guide earnings/loss to?
Heed any comments on customer account losses due to negative publicity and how the company plans to gain that business back.
Comments on E*Trade Bank will be important.
How will the interest rates cuts from earlier this week and those expected to come in the near future help E*Trade -- and to what extent?
What is the company's legal situation, including lawsuits from investors et al.?
There is a lot going on with E*Trade at the moment, but given how terrible sentiment is around the survival of what was the top online broker just half a year ago, any mildly positive comment could propel the shares higher.
On the flip side, if management says anything that is even perceived to be negative, shares could revisit their recent lows. My key is what the company says about being acquired and how open it is to an acquisition.
Good luck whichever way you are playing E*Trade into the call, good guy or darksider.
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At the time of publication, Somaney had no positions in the stocks mentioned, although positions may change at any time without notice. Jay Somaney is a partner and fund manager with TSG Capital Partners, a hedge fund based in Plano, Texas, and founder of GlobalTechStocks.com, a subscription site that focuses on technology and Indian stocks (including ADRs), providing information, news and chatter. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Somaney appreciates your feedback; click here to send him an email.
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