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Bull of the Day: E-Trade Financial (ETFC)

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After years of steady gains and low volatility, the stock market finally hit some turbulence in early February 2018 on the back of interest rate uncertainty and political question marks, and those woes continued in the months to come thanks to trade woes and rising Treasury yields. This has caused market-wide uncertainty at times, but investors should note that increased buying and selling actually benefits brokers, many of which are publicly traded.

One such company is E-Trade Financial (ETFC - Free Report) , a leader in the online brokerage industry since the 1990s. As seen in the company’s recent earnings report, increased trading activity created a blowout quarter for E-Trade, and now the stock is sticking out as one of the strongest in the entire financial services sector.

Now, after strong results and positive forward-looking comments inspired several positive analyst estimate revisions, ETFC is sporting a Zacks Rank #1 (Strong Buy).

Latest Earnings Report

Last week, E-Trade posted earnings of $0.80 per share, beating the Zacks Consensus Estimate of $0.79 and improving significantly from the $0.48 per share recorded in the prior-year quarter. Total revenue for the quarter came in at $708 million, outpacing the Zacks Consensus Estimate of $690 million. Revenues were up 28% from the year-ago quarter.

The key contributor to this success was the company’s daily average revenue trades (DARTs) results. Total DARTs increased 26% year over year to 309,000, including 32% growth in derivatives. At the end of the quarter, E-Trade had 5.5 million customer accounts, up 4% from the year-ago quarter.

E-Trade’s positive report ushered in a plethora of positive estimate revisions for the remainder of the company’s fiscal year. In less than a week since its report, we have seen five revisions to its 2018 EPS estimates, with 100% agreement to the upside among revising analysts. That same ratio is also present in terms of fiscal 2019 revisions.

The Zacks Consensus Estimate for E-Trade’s fiscal 2018 earnings has gained 17 cents in a week. Our consensus projection for its fiscal 2019 earnings has gained 15 cents in that time.

Valuation

For many investors, improving analyst sentiment is just part of the picture, and it is still important to make sure we are not overpaying for this revision activity. Luckily, E-Trade is not outside the range a value investor would look for.

In fact, the stock is trading at a respectable 16.5x forward 12-month earnings. That is a premium to its industry’s average of 11.5x, but it is certainly not outrageous. Meanwhile, the stock is actually trading at a discount to its industry when we factor in earnings growth:

Overall, earnings are expected to improve by more than 61% this year and an additional 11.4% next year. That bottom-line improvement is expected to be supported by revenue growth rates of 19.9% and 7.4%, respectively. E-Trade is checking off a lot of boxes for investors in search of impressive growth options with solid analyst outlooks and reasonable valuations.

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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