E*Trade ( ET - Get Report) has a lot to cheer about these days.

The online broker confirmed Tuesday that it is in talks to merge with Toronto-based rival TD Waterhouse ( TD - Get Report) to create the largest online broker in terms of accounts and daily trading activity. Meanwhile, the company is expected to post a sharp rise in earnings next week, despite a big drop-off in mortgage activity in the fourth quarter.

Shares of E*Trade already have climbed 7% this year after a 160% jump in 2003, but analysts remain generally optimistic on the stock. Michael Vinciquerra, an analyst at Raymond James, maintained his outperform rating Tuesday, saying that further gains are possible if trading activity continues to improve.

E*Trade is expected to post a profit of 17 cents a share in the fourth quarter, up 21% from last year. That's particularly impressive given that the firm expects an 80% to 90% drop in its mortgage business.

"We expect increased trading activity and improving spread income at E*Trade's banking operations to more than offset a pullback in its mortgage operations," said Matt Snowling, an analyst at Friedman Billings Ramsey.

For the full year, E*Trade expects to earn between 56 cents and 58 cents a share on an operating basis, or 50 cents to 54 cents a share on a GAAP basis. The outlook for 2004 also looks impressive, with E*Trade calling for earnings under generally accepted accounting principles of between 70 to 85 cents a share.

Merrill Lynch analyst Colin Clark said he is expecting mortgage originations to fall 60% this year but believes this will be partly offset by higher net-interest income and wider bank spreads. Net interest income is interest earned on loans and investments minus interest paid on deposits.

"We are encouraged by recent brokerage trends and believe E*Trade's diversified brokerage/bank model offers several EPS growth levels," he wrote in a research note.

Analysts also are bullish on Ameritrade's ( AMTD - Get Report) prospects, though they worry that the stock price may be rich at current levels. Ameritrade has climbed 7% so far this year after an almost 150% leap last year.

Merrill's Clark recently cut his estimate on Ameritrade, saying that while the profit picture continues to improve and fundamentals look strong, the stock's forward earnings multiple is too high. Shares trade at 25 times Clark's 2004 estimates while E*Trade sports a forward P/E of just 17.

Still, Richard Repetto, an analyst at Sandler O'Neill, said Ameritrade could have further upside if trading activity continues to ramp up. The company is projected to earn between 14 cents and 17 cents a share in its fiscal first quarter, and 37 cents to 59 cents a share for the full year.

At Schwab ( SCH), the outlook isn't quite as rosy. The company is expected to earn 11 cents a share in the fourth quarter, up 17% from last year but analysts believe the firm struggled to add new accounts and that costs rose due to increased marketing spending.

Snowling is cautious on Schwab, saying it should continue to lag behind its peers "as it increases advertisement, compensation, and employee benefits that were cut during the bear market." He also noted that regulatory concerns could hamper short-term performance.

Schwab said last year that it had uncovered improper trading in its mutual funds and is being investigated by federal and state regulators.

Prudential analyst David Trone also noted that E*Trade's potential acquisition of TD Waterhouse represents "a lost opportunity for Schwab to generate substantial cost savings." BMO Nesbitt Burns analyst Ian de Verteuil predicted last November that a combination of E*Trade and TD Waterhouse could cut costs by up to 40%.

"We would be disappointed to see Schwab lose out on a good potential acquisition opportunity," he wrote. "On the other hand, Schwab shareholders avoid the risk that the company could have overpaid."

Schwab has climbed 6% this year after a 10% gain in 2003.