A month has gone by since the last earnings report for E-Trade (ETFC). Shares have lost about 5.4% 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 Q1 Earnings Beat Estimates, DARTs Disappoint
E*TRADE delivered a positive earnings surprise of 16% in first-quarter 2019. Earnings of $1.09 per share comfortably surpassed the Zacks Consensus Estimate of 94 cents. Moreover, the results compare favorably with 88 cents recorded in the prior-year quarter.
The results reflect improved net revenues, controlled expenses and a benefit to provision for loan losses. Further, the company registered a rise in customer accounts in the quarter. However, DARTs decreased on a year-over-year basis.
E*TRADE’s net income available to common shareholders for the reported quarter came in at $270 million compared with $235 million recorded in the prior-year quarter.
Revenues Improve, Expenses Down
Net revenues in the first quarter came in at $755 million, comfortably beating the Zacks Consensus Estimate of $741 million. The top line was up 6.6% from the year-ago quarter.
Net interest income climbed 10.6% year over year to $492 million, primarily attributed to higher interest income, partially offset by elevated interest expenses. Net interest margin was 3.23%, up 26 basis points from 2.97% reported in the prior-year quarter.
Non-interest income of $263 million remained unchanged year on year. Higher fees and service charges, net gains on securities and other, along with other income were mitigated by lower commissions.
Total non-interest expenses declined 5.1% year over year to $375 million. The downside mainly resulted from reduced advertising and market development, communications and other non-interest expenses, partly offset by higher compensation and benefits expenses.
Mixed Trading Performance
Total DARTs decreased 7% year over year to 279,000 in the March-end quarter, including 32% in derivatives. At the end of the quarter, E*TRADE had 7.1 million customer accounts (including 5.1 million retail accounts), up 29% from the year-ago quarter.
Further, the company’s total customer assets were $597 billion, up 22% year over year. Brokerage-related cash increased 8% to $61.7 billion.
Notably, customers were net buyers of about $3.3 billion of securities compared with $6.9 billion in the prior-year quarter. Net new retail assets totaled $4.8 billion, down 9% from the comparable period last year.
Credit Quality: A Mixed Bag
E*TRADE’s overall credit quality displayed improvement. Net recoveries were $7 million in the January-March quarter compared with $8 million recorded as of Dec 31, 2018. Also, the company recorded a provision benefit of $12 million compared with $21 million reported a year ago.
Balance Sheet and Capital Ratios
E*TRADE’s loan portfolio totaled $2 billion at the end of the reported quarter, down from $2.1 billion as of Dec 31, 2018.
As of Mar 31, 2019, E*TRADE had total assets of $67.5 billion compared with $65 billion as of Dec 31, 2018.
The company’s capital ratios remained strong. As of Mar 31, 2019, E*TRADE reported Tier 1 risk-based capital ratio of 35.9% compared with 41.4% witnessed in the year-ago quarter. Total risk-based capital ratio was 36.3%, down from 45.7% in the prior-year quarter. Tier 1 leverage ratio was 6.7% compared with 7.3% in the year-earlier quarter.
During the first quarter, the company returned $155 million to shareholders, including dividends worth $35 million and share repurchases worth $120 million.
Management targets adjusted operating margin of 48% for 2019.
The full year tax rate is expected to be around 27%.
NIM is anticipated to be in the range of 315-320 basis points.
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.
At this time, E-Trade has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
E-Trade has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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