NEW YORK (
new CEO Stephen Freiberg made clear he's more focused on turnaround than takeout in the conference call following the company's first-quarter report.
Asked by Credit Suisse analyst Howard Chen about the "feasibility and appetite" for an oft-rumored acquisition of E*Trade -- the name mentioned the most as a potential suitor is
-- Freiberg was prepared with a quick and firm message.
"We expected that question would come up," he said. "Let me just emphasize, Howard, and I do appreciate the question, that we have a driving online brokerage business, we have strengthened our financial position, and I believe we have the opportunity to grow and prosper as a standalone company. And I think that sums it up."
E*Trade shares were off 3 cents to $1.79 in midday trades in the wake of the first-quarter report. The company reported a loss that was a penny narrower than Wall Street but it also disclosed plans to eliminate inactivity fees that it expects to take a small bite out of revenue for the rest of the year, and trading activity slipped in comparison to rivals.
Analyst reaction to the numbers reflected measured optimism. FBR Capital Markets analyst Matt Snowling commended the company for its continued turnaround and noted it still has a long ways to go.
"Although the turnaround at
E*Trade will take two to three years to complete, the company continues to reach important milestones on time or ahead of schedule, which we believe should give investors increasing confidence that it can successfully run off its bad loan assets while keeping the core franchise intact," Snowling said.
"The quarter marked an important milestone as the bank
subsidiary generated capital organically, which we view as an important first step toward eventually releasing excess capital to the parent company," the note said. "Furthermore net interest income has remained strong despite the company's efforts to shrink and de-risk the balance sheet, due mainly to a better funding mix and reinvesting cash into longer duration securities."
Snowling reiterated an outperform rating on the stock with $2 price target, and improved his estimate for 2010 to a loss of 3 cents a share from a prior view of 10 cents, citing quicker than expected declines in credit costs and better net interest income due to higher spreads.
After Wednesday's closing bell, E*Trade posted a first-quarter loss of $48 million, or 2 cents a share. That performance compared to a loss of 4 cents a share in the prior quarter, and 41-cent loss in the first quarter of 2009. Revenue inched higher for the quarter to $537 million vs. $523 million in the fourth quarter and up 8% from the year-earlier quarter, while the company's provision for loan losses fell by 8% from the fourth quarter to $268 million.
But E*Trade's DARTs (daily average revenue trades) for the first three months of the year -- a key indicator of how the firm's brokerage operations are performing - totaled 155,000, down 2% from the fourth quarter.
That compares to higher sequential DARTs at rival
and flat daily average trades at
. E*Trade's DART comparisons to the year-earlier quarter were also worse than its two major rivals, according to Sandler O'Neill & Partners.
E*Trade shares have been stuck below the $2 level since late April 2009 after it announced, along with first-quarter loss, that it needed to undergo a second recapitalization plan. But shares have been moving up as of late, along with the broader financial markets. Through Wednesday's close, the stock was up 3.4% year-to-date.
Despite Freiberg's comments, Snowling said he continues to factor the potential for a deal into his view of the company's valuation. He believes E*Trade will approach breakeven in the second half of this year and return to profitability in 2010.
"Although we still expect the road to 'normalized earnings' to be a long one, we continue to believe ETFC warrants a higher valuation based of such earnings with upside potential from those levels arising from the potential for the company to become a takeover target prior to a full recovery of operating results," he said.
--Written by Laurie Kulikowski in New York.