It has been about a month since the last earnings report for E-Trade (ETFC). Shares have lost about 1.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is E-Trade due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
E*TRADE Q4 Earnings Beat, Trading Metrics Improve
E*TRADE reported fourth-quarter 2018 earnings of $1.06 per share, which surpassed the Zacks Consensus Estimate of $1.05. Moreover, the results, including certain one-time items, compared favorably with 48 cents recorded in the prior-year quarter.
The results reflected improved net revenues and a benefit to provision for loan losses. Daily average revenue trades (DARTs) increased on a year-over-year basis. Further, the quarter registered a rise in customer accounts. However, higher expenses posed a concern.
E*TRADE’s net income available to common shareholders for the quarter came in at $270 million compared with $129 million recorded a year ago.
For full-year 2018, the company reported net income available to common shareholders of $1.02 billion or $3.88 per share, up from $589 million or $2.15 per share.
Revenues Improve, Expenses Rise
Net revenues in the reported quarter came in at $735 million, lagging the Zacks Consensus Estimate of $747.4 million. Revenues were up 15.4% from the year-ago quarter.
Total revenues for 2018 were $2.87 billion, up 21.4% from the year-ago quarter. However, it lagged the Zacks Consensus Estimate of $2.89 billion.
Net interest income climbed 15% on a year-over-year basis to $482 million, primarily due to higher interest income, partially offset by elevated interest expenses. Net interest margin was 3.20%, up 28 basis points from 2.92% reported in the prior-year quarter.
Non-interest income of $253 million increased 16.1%. The reported quarter recorded higher commissions.
Total non-interest expenses increased 4.9% year over year to $382 million. The rise resulted mainly from higher compensation and benefits expenses, amortization of other intangibles and advertising and market development expenses.
Improved Trading Performance
Total DARTs increased 29% year over year to 295,692 in the fourth quarter, including 31% in derivatives. At the end of the quarter, E*TRADE had nearly 7 million customer accounts (including 4.9 million brokerage accounts), up 28%.
Further, the company’s total customer assets were $414.1 billion, up 8% year over year. Brokerage-related cash increased 2% to $54.2 billion.
Notably, customers were net buyers of about $1.6 billion of securities compared with $2.3 billion in the prior-year quarter. Net new brokerage assets totaled $19.1 billion, up significantly from $3.2 billion.
Credit Quality Improves
E*TRADE’s overall credit quality depicted an improvement. Net recoveries were $8 million in the fourth quarter compared with $6 million recorded in the prior-year quarter. Also, the company recorded a provision benefit of $12 million compared with $26 million reported a year ago.
Allowance for loan losses declined 50% year over year to $37 million.
Balance Sheet and Capital Ratios
E*TRADE’s loan portfolio totaled $2.1 billion at the end of the reported quarter, down from $2.3 billion as of Sep 30, 2018.
As of Dec 31, 2018, E*TRADE had total assets of $65 billion compared with $64.7 billion in the previous quarter.
The company’s capital ratios remained strong. As of Dec 31, 2018, E*TRADE reported Tier 1 risk-based capital ratio of 37.4% compared with 39.5% in the year-ago quarter. Total risk-based capital ratio was 37.7%, down from 43.8%. Tier 1 leverage ratio was 6.6% compared with 7.4% in the year-ago quarter.
During the fourth quarter, the company repurchased 10.3 million shares at an average price of $48.53.
E*TRADE targets sustainable mid-teens EPS growth for the next five years, amounting to an approximate double of its earnings power by 2023. Second, it plans to expand operating margin from its current 48% level to 50% in 2020 and drive toward a mid-50s level by 2023. Third, management looks forward to expand ROE from the current level of approximately 16% to beyond 20%. And fourth, the company plans to achieve these targets while also returning significant capital to shareholders via dividends and buybacks.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month.
Currently, E-Trade has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
E-Trade has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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