Updated to include analyst interview comments, closing share price.
"We do not believe that recent chatter regarding the potential purchase of E*Trade by TD Ameritrade has any merit," the firm told clients in a note Tuesday. "In our opinion, E*Trade needs several more quarters to work through its loan loss provisions before another online brokerage firm could reasonably be anticipated to acquire it."
The note was more of a general call on the brokerage and exchange sectors, lowering earnings estimates on both groups to reflect weaker stock trading volumes of late. In addition to E*Trade and TD Ameritrade, the firm cut its views for the fourth quarter on Charles Schwab (SCHW), Investment Technology Group (ITG), Knight Capital Group (NITE), Nasdaq OMX Group (NDAQ), NYSE Euronext (NYX), optionsXpress Holdings (OXPS), Penson Worldwide (PNSN), and TradeStation Group (TRAD).Raymond James is still relatively bullish on the online brokers for the long-term, however, calling an increase in interest rates -- whenever it occurs -- "a very powerful catalyst for future earnings growth" and citing strong cash positions and the prospect of share buybacks as other positives. But the round of speculation prompted last week by pro-M&A comments from TD Ameritrade CEO Fred Tomczyck at a Reuters conference roused the firm to weigh in. Beyond the contention that the overhang from E*Trade's ongoing wind-down of its home loan portfolio was significant enough to stave off any suitors for months, Raymond James also took issue with valuation assumptions that have been floated for E*Trade.
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