A month has gone by since the last earnings report for E-Trade . Shares have added about 6.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is E-Trade due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
E*TRADE Q3 Earnings Impress on Improved Trading Activity
E*TRADE delivered a positive earnings surprise of 20.5% in third-quarter 2018. Earnings of $1.00 per share comfortably surpassed the Zacks Consensus Estimate of 83 cents. Moreover, the results, including certain one-time items, compared favorably with 49 cents recorded in the prior-year quarter.
The results reflected improved net revenues, controlled expenses and a benefit to provision for loan losses. DARTs increased on a year-over-year basis. Further, the quarter registered a rise in customer accounts and reduced delinquencies.
E*TRADE’s net income available to common shareholders for the quarter came in at $261 million compared with $135 million recorded in the prior-year quarter.
Revenues Improve, Expenses Down
Net revenues in the reported quarter came in at $720 million, comfortably surpassing the Zacks Consensus Estimate of $715.2 million. Revenues were up 20.2% from the year-ago quarter.
Net interest income climbed 19.2% on a year-over-year basis to $466 million, primarily due to higher interest income, partially offset by elevated interest expenses. Net interest margin was 3.10%, up 25 basis points from 2.85% reported in the prior-year quarter.
Non-interest income of $254 million increased 22.1% from the year-ago quarter. The reported quarter recorded higher commissions, elevated fees and service charges, along with other income.
Total non-interest expenses declined 6.2% year over year to $380 million. The decrease resulted mainly from reduced losses on early extinguishment of debt, partly offset by higher compensation and benefits expenses.
Improved Trading Performance
Total DARTs increased 29% year over year to 266,290 in the third quarter, including 32% in derivatives. At the end of the quarter, E*TRADE had 6 million customer accounts (including 3.9 million brokerage accounts), up 11% from the year-ago quarter.
Further, the company’s total customer assets were $472.8 billion, up 29% year over year. Brokerage-related cash increased 2% year over year to $53.3 billion.
Notably, customers were net buyers of about $2.2 billion of securities compared with $1.3 billion in the prior-year quarter. Net new brokerage assets totaled $3.2 billion, up 45% from the year-earlier quarter.
Credit Quality Marks Significant Improvement
E*TRADE’s overall credit quality depicted an improvement. Net recoveries were $21 million in the July-Sep quarter compared with $7 million recorded in the prior-year quarter. Also, the company recorded a provision benefit of $34 million compared with $29 million reported in the comparable period last year.
Allowance for loan losses plummeted 56.4% year over year to $41 million. Additionally, total special delinquencies (30-89 days delinquent) dropped 25.5% year over year to $76 million in E*TRADE’s entire loan portfolio. Notably, total delinquent loans dipped 30.2% year over year to $187 million.
Balance Sheet and Capital Ratios
E*TRADE’s loan portfolio totaled $2.3 billion at the end of the reported quarter, down from $2.7 billion as of Dec 31, 2017.
As of Sep 30, 2018, E*TRADE had total assets of $64.7 billion compared with $63.4 billion as of Dec 31, 2017.
The company’s capital ratios remained strong. As of Sep 30, 2018, E*TRADE reported Tier 1 risk-based capital ratio of 40.5% compared with 37.8% in the year-ago quarter. Total risk-based capital ratio was 40.9%, down from 42.4% in the prior-year quarter. Tier 1 leverage ratio was 7.1% compared with 7.2% in the year-ago quarter.
During the third quarter, the company repurchased 5.3 million shares at an average price of $51.38, completing the existing share repurchase authorization of $1 billion. Notably, E*TRADE’s Board of Directors approved a new $1 billion share repurchase program.
Outlook
Management expects blended deposit costs to be 25 basis points in fourth quarter. Following the Fed September rate hike, average reinvestment rate in the securities portfolio is now in the 300 to 325 basis point range, similar to the prior quarter. For 2018, management forecasts to fall within the range of 305 to 310 basis points, assuming customer margin balances remain at current levels.
For 2018, management targets an adjusted operating margin to surpass 46%, given strong results year to date and the benefit of the September rate hike.
Going forward, management expects average commission per trade to be in the 700 to 705 basis points range in the fourth quarter. Further, in the fourth quarter, third-party cash is anticipated to generate 150 basis points.
Management projects tax rate to be approximately 26% for 2018 and a go-forward rate of about 27%.
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.
Long-term Targets
E*TRADE targets sustainable mid-teens EPS growth for the next five years, amounting to an approximate double of its earnings power by 2023. Second, it plans to expand operating margin from its current 48% level to 50% in 2020 and drive toward a mid-50s level by 2023. Third, management looks forward to expand ROE from the current level of approximately 16% to beyond 20%. And fourth, the company plans to achieve these targets while also returning significant capital to shareholders via dividends and buybacks.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 5.87% due to these changes.
VGM Scores
Currently, E-Trade has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile 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.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise E-Trade 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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E-Trade (ETFC) Up 6.7% Since Last Earnings Report: Can It Continue?
A month has gone by since the last earnings report for E-Trade . Shares have added about 6.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is E-Trade due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
E*TRADE Q3 Earnings Impress on Improved Trading Activity
E*TRADE delivered a positive earnings surprise of 20.5% in third-quarter 2018. Earnings of $1.00 per share comfortably surpassed the Zacks Consensus Estimate of 83 cents. Moreover, the results, including certain one-time items, compared favorably with 49 cents recorded in the prior-year quarter.
The results reflected improved net revenues, controlled expenses and a benefit to provision for loan losses. DARTs increased on a year-over-year basis. Further, the quarter registered a rise in customer accounts and reduced delinquencies.
E*TRADE’s net income available to common shareholders for the quarter came in at $261 million compared with $135 million recorded in the prior-year quarter.
Revenues Improve, Expenses Down
Net revenues in the reported quarter came in at $720 million, comfortably surpassing the Zacks Consensus Estimate of $715.2 million. Revenues were up 20.2% from the year-ago quarter.
Net interest income climbed 19.2% on a year-over-year basis to $466 million, primarily due to higher interest income, partially offset by elevated interest expenses. Net interest margin was 3.10%, up 25 basis points from 2.85% reported in the prior-year quarter.
Non-interest income of $254 million increased 22.1% from the year-ago quarter. The reported quarter recorded higher commissions, elevated fees and service charges, along with other income.
Total non-interest expenses declined 6.2% year over year to $380 million. The decrease resulted mainly from reduced losses on early extinguishment of debt, partly offset by higher compensation and benefits expenses.
Improved Trading Performance
Total DARTs increased 29% year over year to 266,290 in the third quarter, including 32% in derivatives. At the end of the quarter, E*TRADE had 6 million customer accounts (including 3.9 million brokerage accounts), up 11% from the year-ago quarter.
Further, the company’s total customer assets were $472.8 billion, up 29% year over year. Brokerage-related cash increased 2% year over year to $53.3 billion.
Notably, customers were net buyers of about $2.2 billion of securities compared with $1.3 billion in the prior-year quarter. Net new brokerage assets totaled $3.2 billion, up 45% from the year-earlier quarter.
Credit Quality Marks Significant Improvement
E*TRADE’s overall credit quality depicted an improvement. Net recoveries were $21 million in the July-Sep quarter compared with $7 million recorded in the prior-year quarter. Also, the company recorded a provision benefit of $34 million compared with $29 million reported in the comparable period last year.
Allowance for loan losses plummeted 56.4% year over year to $41 million. Additionally, total special delinquencies (30-89 days delinquent) dropped 25.5% year over year to $76 million in E*TRADE’s entire loan portfolio. Notably, total delinquent loans dipped 30.2% year over year to $187 million.
Balance Sheet and Capital Ratios
E*TRADE’s loan portfolio totaled $2.3 billion at the end of the reported quarter, down from $2.7 billion as of Dec 31, 2017.
As of Sep 30, 2018, E*TRADE had total assets of $64.7 billion compared with $63.4 billion as of Dec 31, 2017.
The company’s capital ratios remained strong. As of Sep 30, 2018, E*TRADE reported Tier 1 risk-based capital ratio of 40.5% compared with 37.8% in the year-ago quarter. Total risk-based capital ratio was 40.9%, down from 42.4% in the prior-year quarter. Tier 1 leverage ratio was 7.1% compared with 7.2% in the year-ago quarter.
During the third quarter, the company repurchased 5.3 million shares at an average price of $51.38, completing the existing share repurchase authorization of $1 billion. Notably, E*TRADE’s Board of Directors approved a new $1 billion share repurchase program.
Outlook
Management expects blended deposit costs to be 25 basis points in fourth quarter. Following the Fed September rate hike, average reinvestment rate in the securities portfolio is now in the 300 to 325 basis point range, similar to the prior quarter. For 2018, management forecasts to fall within the range of 305 to 310 basis points, assuming customer margin balances remain at current levels.
For 2018, management targets an adjusted operating margin to surpass 46%, given strong results year to date and the benefit of the September rate hike.
Going forward, management expects average commission per trade to be in the 700 to 705 basis points range in the fourth quarter. Further, in the fourth quarter, third-party cash is anticipated to generate 150 basis points.
Management projects tax rate to be approximately 26% for 2018 and a go-forward rate of about 27%.
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.
Long-term Targets
E*TRADE targets sustainable mid-teens EPS growth for the next five years, amounting to an approximate double of its earnings power by 2023. Second, it plans to expand operating margin from its current 48% level to 50% in 2020 and drive toward a mid-50s level by 2023. Third, management looks forward to expand ROE from the current level of approximately 16% to beyond 20%. And fourth, the company plans to achieve these targets while also returning significant capital to shareholders via dividends and buybacks.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 5.87% due to these changes.
VGM Scores
Currently, E-Trade has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile 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.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise E-Trade has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.