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Analyst: $0 Commissions Makes E*TRADE A Buyout Target

Wayne Duggan

The discount broker pricing war that has pushed trading commission fees down to $0 virtually across the board has been bad news for broker stocks and fee revenues. However, one analyst said Monday that E*TRADE Financial Corp (NASDAQ: ETFC) is now an attractive buyout target in the post-commission world.

The Analyst

Bank of America analyst Michael Carrier reiterated his Buy rating and $45 price target for E*TRADE.

The Thesis

Carrier said discount brokers are in a tough spot due to disappearing commission revenue, falling interest rates and peaking retail market engagement for the current cycle. One way for discount brokers to counter the headwinds of losing commission revenue us to scale their businesses via mergers and acquisitions.

Carrier said E*TRADE is an attractive potential target for both Charles Schwab Corporation (NYSE: SCHW) and TD Ameritrade Holding Corp. (NASDAQ: AMTD). Bank of America estimates the potential takeout premium for E*TRADE would be about 25% above market price regardless of the buyer.

“Given its valuation, decent core trends, active expense/capital management, and M&A optionality, ETFC remains our top pick among the online brokers,” Carrier wrote in a note.

M&A could also be good news for the buyers. Carrier said TD Ameritrade could generate 70% cost synergies in a hypothetical takeover of E*TRADE, which would produce between 25% and 30% EPS accretion. Schwab would also enjoy 70% cost synergies while producing between 15% and 20% EPS accretion if it makes a play for E*TRADE.

Benzinga’s Take

Look for discount brokers to be aggressive in making adjustments given their relatively strong cash flows and limited near-term organic growth opportunities. Don’t underestimate how much fear could drive the bidding for E*TRADE as well, as neither Schwab nor TD Ameritrade wants to watch E*TRADE go to its competitor.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

  • Related Links:
  • UBS Upgrades E-Trade, Downgrades TD Ameritrade After Commission-Free Shake-Up
  • How And Why Are Online Brokers Offering Commission-Free Trades?

Latest Ratings for ETFC

Date Firm Action From To
Oct 2019 Maintains Hold
Oct 2019 Maintains Overweight
Oct 2019 Maintains Underweight

View More Analyst Ratings for ETFC
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