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

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Feisty bouts of volatility in global and domestic equities markets, fueled by rising interest rates and worldwide economic uncertainty, have erased gains in many key indexes and sparked concerns about the near-term future. But investors should note that increased buying and selling from traders betting on that future can actually benefit from publicly-traded companies.

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

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

Latest Earnings & Outlook

E-Trade most recently reported earnings on October 16. Results were for the company’s fiscal quarter that ended in September. The online brokerage tallied earnings of $1.00 per share, crushing the Zacks Consensus Estimate of $0.83 and improving over 104% from the year-ago period.

Total revenue in the quarter came in at $720 million. This marked year-over-year growth of 20% and comfortably surpassed our consensus estimate of $715.2 million. Daily Average Revenue Trades (DARTs), a key metric of commissioned trades, surged 29% from the prior-year period. Total customer assets were up 29% to $472.8 billion, and the company repurchased 5.3 million shares to complete its $1 billion buyback program. E-Trade’s board also approved another $1 billion in share repurchases.

E-Trade reports a number of key metrics on a monthly basis, so we have the benefit of knowing that this growth momentum actually picked up in October. DARTs for October were up 40% from the prior-year month, and the platform notched new brokerage assets of $1.2 billion. E-Trade’s customers bought about $2.7 billion in securities during October.

E-Trade’s recent strength and positive outlook inspired a number of positive earnings estimate revisions from analysts:

With the current fiscal year nearing its close, the most positive trend in the above-pictured estimate revisions is the universally-positive adjustment to the Zacks Consensus mark for E-Trade’s upcoming fiscal year. This means the company’s outlook for 2019 is improving, implying that analysts think this hot streak can continue.

Valuation

The Zacks Rank is foundationally bound to earnings estimates, estimate revisions, and actual earnings results. Because of the earnings beats and strong revisions trends that E-Trade has seen recently, the stock has earned a #1 (Strong Buy) designation. But there are more reasons to like the company right now, including its valuation.

Here’s a look at how E-Trade shares have traded based on the firm’s forward 12-month earnings outlook over the past six months:

ETFC trades at about 12.1x forward earnings, which is a slight premium to its peer group's average of 10.2x. This valuation is relatively low compared to the broader market and E-Trade’s own recent valuations, but when a particular stock is trading at a premium to its peers, we have to ask ourselves why that is the case and if its justified.

In E-Trade’s case, the long-term growth prospects make a 12.1x earnings multiple look dirt cheap. E-Trade is currently targeting EPS growth in the mid-teen percentages for the next five years, meaning that it will double its earnings power by 2023 simply by staying on track with that goal.

This staggering earnings growth potential is also meant to be delivered while returning significant capital to shareholders via dividends and buybacks, so there is a lot to like here for investors. E-Trade’s current valuation makes its long-term growth plan even more attractive, and positive estimate revisions and continued outperformance of expectations will lift shares in the near-term.

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