As Peers Warn About Earnings, E*Trade Is Seen as Insulated

Online financial services outlet E*Trade(ET) probably won't join its peers in warning about second-quarter earnings, analysts said.

A weak trading environment in May forced Charles Schwab(SCH) to cut its numbers Thursday. Ameritrade(AMTD) followed with its own warning Friday.

But E*Trade has a great track record on meeting its estimates compared with Schwab and Ameritrade. "They usually don't warn and they usually don't miss," said Putnam Lovell analyst Todd Halky. Whereas both Schwab and Ameritrade are lowering their guidance for the second quarter in a row, E*Trade has beaten consensus estimates for the past three quarters.

More importantly, E*Trade now gets around 30% of revenue from mortgage lending and 13% from other banking products, which should help protect it against a depressed stock market. "From E*Trade's perspective, being the diversified financial platform that they are, they are better positioned than the other players to fight their way through the summer doldrums on the trading side," said Halky.

On average, analysts are expecting E*Trade to earn 11 cents a share in the second quarter, with estimates ranging from a low of 10 cents to a high of 12 cents a share. The company earned 8 cents a share in the first quarter.

Halky, who forecasts a 12-cent-a-share profit for the company, expects net revenue will be flat for the second quarter, with weakness on the retail brokerage side balanced out by an increase in net bank spreads and potential upside in the mortgage origination business. Net bank spreads are seen widening as a result of the company's acquisition of Chase banking accounts, a deal that closed in February.

The increase in earnings vs. the first quarter should be driven by a reduction in marketing spending, the analyst said. He estimates that marketing spending will slide to $56 million in the second quarter from $69 million in the first quarter, when E*Trade spent heavily on Super Bowl advertising.

E*Trade shares were lately gaining 1.4% to $5.11. The shares are valued at 11.4 times estimated 2002 earnings of 45 cents a share.

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