Shares of E*TRADE Financial Corporation (ETFC) have recorded a year-to-date return of almost 8%. The company benefited from a rise in total daily average revenue trades (DARTs) and lower provisions. However, we are not confident that these positives will translate into further strength down the road, as there will be considerable pressure on its revenues owing to the persistent low interest rate environment.
After analyzing the company’s fundamentals following its fourth-quarter 2013 earnings release, our suggestion is to keep the shares in your portfolio. However, adding more shares of E*TRADE Financial may not be a good idea due to prevalent headwinds.
Why This Stance?
E*TRADE reported fourth-quarter 2013 net income of 20 cents per share, which was in line with the Zacks Consensus Estimate. However, results improved significantly from a loss of 65 cents per share in the year-ago quarter.
The recent rebound in equity markets has been favorable for the company and has resulted in an increase in DARTs for 2013. Further, the company’s strong focus on loss mitigation strategies such as short sales, loan modifications and transfers to better servicers are expected to enhance DARTs in the future.
We are also encouraged by the company’s recent retail alliance with investment bank Jefferies LLC, a fully owned subsidiary of Leucadia National Corp. (LUK), to allow access to Jefferies underwritings of IPO and follow-on equity offerings. Going forward, we expect such initiatives and customer services to lower the attrition rate of the annual brokerage accounts further.
Additionally, we are encouraged by the company’s efforts to reduce its balance sheet risk by mitigating credit risk in its loan portfolios. These initiatives have resulted in substantial improvement of the company’s credit quality.
However, the E*TRADE’s net interest spread and net interest income are expected to be under pressure in the near term due to the persistent low interest rate environment. Additionally, sluggish economic recovery and investors’ cautious attitude toward equity markets’ investment can put further pressure on trading business and keep the company’s DARTs under pressure.
When it comes to estimate revision, the company has witnessed a positive movement. Hence, E*TRADE currently has a Zacks Rank #2 (Buy). For 2014, over the last 30 days, the Zacks Consensus Estimate moved up 3% to 90 cents per share. For 2015, the Estimate rose 6% to $1.14 per share.
Other Stocks to Consider
Investors interested in the investment brokerage sector could consider stocks like Raymond James Financial, Inc. (RJF) and The Charles Schwab Corp. (SCHW), both of which have a Zacks Rank #2.