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Can E*TRADE Financial (ETFC) Q3 Earnings Pull a Surprise?

STT ETFC RJF LAZ

Trades from $3

E*TRADE Financial Corporation (ETFC - Free Report) is scheduled to report third-quarter 2016 results on Oct 20.

The company’s second-quarter earnings beat the Zacks Consensus Estimate and improved on a year-over-year basis. Results were aided by increased revenues, reduced expenses and a benefit from provisions. Further, the quarter witnessed an increase in daily average revenue trades (DARTs) along with growth in customer accounts.

Interestingly, E*TRADE delivered positive earnings surprises in each of the trailing four quarters, with an average earnings beat of 17.7%. Regarding the stock performance, E*TRADE gained around 14% over the last three months.

E TRADE FINL CP Price, Consensus and EPS Surprise

Will the upcoming earnings release give a further boost to the E*TRADE’s stock? This majorly depends on whether the firm posts a beat for the fifth straight quarter. However, our quantitative model has some other story to say.

E*TRADE doesn’t have the right combination of the two key ingredients – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) – that increases the odds of an earnings beat.

Zacks ESP: The Earnings ESP for E*TRADE is 0.00%. This is because both the Most Accurate Estimate and the Zacks Consensus Estimate stand at 38 cents.

Zacks Rank: E*TRADE’s Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of a positive earnings surprise.

What to Expect in Q3?

Trading activity is expected to be muted as third-quarter 2016 experienced a slowdown related to seasonal patterns and a low level of volatility. Hence, E*TRADE’s daily average revenue trades (DARTs) may decline. However, the company might benefit to some extent from the acquisition of an online options broker – OptionsHouse – that closed on Sep 12, 2016.

The third quarter recorded a strong performance by equity markets with the S&P 500 Index gaining 3.3%. This should help the company to witness growth in client assets.

Regarding expenses, the quarterly results should reflect severance charge related to the termination of E*Trade’s former CEO.  Also, the company is likely to record deal-related expenses.

During the last quarter’s earnings call, management mentioned that it remains pleased with the performance of HELOC conversions. However, a sizeable number of conversions still remains which may result in increased losses. Nevertheless, management believes that it is adequately cushioned to counter the losses and hence expects the provision to be zero through the remainder of the year.

The rate environment continues to impact margin with the company’s average reinvestment rate. Notably, management expects NIM in the range of mid-250s in the second half of the year. The guidance assumed no change in the fed funds rate and margin balances at their current level.

Activities of E*TRADE during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter declined 2.6% to 38 cents per share over the last seven days. However, the estimated figure reflects year-over-growth of more than 15%.

Stocks that Warrant a Look

Here are some stocks worth considering, as they have the right combination of elements to post an earnings beat this quarter.

State Street Corporation (STT - Free Report) is slated to release results on Oct 26. The company has an Earnings ESP of +0.80% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Raymond James Financial, Inc. (RJF - Free Report) has an Earnings ESP of +2.04% and carries a Zacks Rank #2. The company is slated to release results on Oct 26.

Lazard Ltd. (LAZ - Free Report) , another Zacks Rank #2 stock, has an Earnings ESP of +3.90%. It is scheduled to report results on Oct 27.

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