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E*TRADE Financial (ETFC) Up 10.2% Since Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for E*TRADE Financial Corporation . Shares have added about 10.2% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is ETFC due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

E*TRADE Q1 Earnings Beat on Improved Trading Metrics

E*TRADE recorded positive earnings surprise of 11.4% in first-quarter 2018. Earnings of 80 cents per share comfortably surpassed the Zacks Consensus Estimate of 79 cents. Moreover, results compared favorably with 48 cents recorded in the prior-year quarter.

Results reflected increased net revenues and a benefit to provision for loan losses. DARTs increased year over year. Further, the quarter witnessed rise in customer accounts and reduced delinquencies. However, elevated operating expenses were on the downside.

E*TRADE’s net income available to common shareholders for the quarter came in at $235 million compared with $132 million recorded in the prior-year quarter.

Revenues Escalate, Expenses Flare Up

Net revenues for the reported quarter came in at $708 million, handily outpacing the Zacks Consensus Estimate of $690 million. Revenues were up 28% from the year-ago quarter.

Net interest income surged 39.5% on a year-over-year basis to $445 million, primarily due to higher interest income, partially offset by elevated interest expense. Net interest margin was 2.97%, up 34 basis points from 2.63% in the prior-year quarter.

Non-interest income of $263 million increased 12.4% from the year-ago quarter. The reported quarter recorded higher commissions, and elevated fees and service charges.

Total non-interest expenses flared up 15.5% year over year to $395 million. The increase was due to rise in almost all the expense components.

Improved Trading Performance

Total DARTs increased 26% year over year to 309,000 in the reported quarter, including 32% in derivatives. At the end of the quarter, E*TRADE had 5.5 million customer accounts (including 3.7 million brokerage accounts), up 4% from the year-ago quarter.

Further, the company’s total customer assets were $392.8 billion, up 17% year over year. Brokerage-related cash decreased 3% year over year to $51.9 billion.

Notably, customers were net buyers of about $6.9 billion of securities compared with $1.6 billion in the prior-year quarter. Net new brokerage assets totaled $5.3 billion, up 26% from the year-earlier quarter.
 
Credit Quality Marks Significant Improvement

Overall, credit quality improved at E*TRADE. Net recoveries were $5 million in the reported quarter compared with $6 million recorded in the prior-year quarter. Also, the company witnessed a provision benefit of $21 million compared with $14 million reported in the year-ago quarter.

Allowance for loan losses plummeted 72.8%, year over year, to $58 million. Additionally, total special delinquencies (30-89 days delinquent) dropped 29% year over year to $93 million in E*TRADE’s entire loan portfolio. Notably, total delinquent loans dipped 26.4% year over year to $229 million.

Balance Sheet and Capital Ratios

E*TRADE’s loan portfolio totaled $2.5 billion at the end of the reported quarter, down from $3.3 billion as of Mar 31, 2017.

As of Mar 31, 2018, E*TRADE had total assets of $64.2 billion compared with $55.9 billion as of Mar 31, 2017.

The company’s capital ratios remained strong. As of Mar 31, 2018, E*TRADE reported Tier 1 risk-based capital ratio of 41.4% compared with 35.4% witnessed in the year-ago quarter. Total risk-based capital ratio was 45.7%, up from 40.7% in the prior-year quarter. Tier 1 leverage ratio was 7.3% compared with 7.2% in the year-ago quarter.

During the first quarter, the company repurchased 2.7 million shares at an average price of $52.12, for a total cost of $140.7 million.

Outlook

For 2018, management targets an adjusted operating margin of 44.5-45%, with the assumption of no increase in the Fed benchmark rate from current levels and incorporates management plans to increase investments in the business over the course of 2018, including a ramp-up in marketing spend to a total of around $200 million, and some level of deposit repricing.

However, based on a fed hike in June, and movement of deposit rates in line with the company’s expected betas, adjusted operating margin is likely to surpass 45% for 2018.

Management expects net interest margin (NIM) of 300-310 basis points in 2018, with the assumption of customer margin balances to be flat at current levels of around $10.2 billion and no Fed funds increases during the year.

Going forward, management expects average commission per trade to be in the 720 to 740 range.

Management projects effective tax rate to be approximately 27% for 2018, with some quarterly volatility due to the impact of share-based compensation awards and future revaluations of state deferred tax assets.

With respect to balance-sheet growth, excluding money-market balances, management expects to maintain around $3.5 billion in off balance sheet sweet cash program to maximize FDIC insurance coverage.

For 2018, the TCA acquisition deal, completed in April 2018, is likely to be neutral to bottom-line results, including cost of the issue of preferred stock which is planned to fund the transaction. For 2019, management expects 2 cents earnings accretion with an IRR of approximately 20%, assuming modest expense synergy. Additionally, when full synergies are achieved in 2019, management expects TCA to contribute around $80 million in revenue and be slightly accretive to overall operating margins. For second-quarter 2018, management expects the distribution from the broker-dealer to be $100 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter.

VGM Scores

At this time, ETFC has a nice Growth Score of B. Its Momentum is doing a bit better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for momentum investors than growth investors.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise ETFC has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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