E*TRADE Investors Win If It Meets Milestones – Or Doesn't: Credit Suisse
E*TRADE Financial Corporation (ETFC) received an Outperform rating with a price target of $56 from Credit Suisse, which believes that the stock could do well as the company shifts away from defensive mode to a more offensive approach.
In a research report, Credit Suisse analyst Craig Siegenthaler said that, with the board of E*TRADE setting specific financial metrics for management to meet, the stock could increase if those milestones are reached. However, if management fails to reach the milestones, the board has said that it will look for alternatives for the online brokerage, including a potential sale, which Siegenthaler said could also lift the stock.
The analyst pointed to TD Ameritrade (AMTD) and Charles Schwab (SCHW) as potential suitors for E*TRADE. However, he also noted that a large bank without a strong direct retail channel – such as JPMorgan Chase & Co. (JPM) – or a consumer finance company could also vie for E*TRADE if the board puts the online brokerage up for sale. "We believe the ETFC stock has a unique setup in which poor results versus expectations could actually lead to stock outperformance," the analyst wrote in a note to clients on Dec. 1.
The way Siegenthaler sees it, with the online brokerage providing more aggressive financial guidance targets around growth and profitability and its latest advertising campaign aimed at getting more clients, E*TRADE is now acting offensively rather than defensively. "Management is looking to recapture its place as a market leader in the online brokerage space after falling from grace in the 2008 financial crisis," wrote Siegenthaler. "Specifically, E*TRADE always had a leading self-directed business, but the firm almost went bankrupt in 2008 when large losses in its ABS and third-party originated loan portfolio quickly ate up its capital. Today, its credit quality is no longer an issue."
Siegenthaler also pointed to E*TRADE's corporate services business and its newly acquired institutional business as two areas of future growth. When E*TRADE reported third-quarter earnings, it announced that it was acquiring Trust Company of America for $275 million. Siegenthaler said that the acquisition gives E*TRADE access to the registered independent advisors custody business that has been a big profit generator for rival online brokers.
From a valuation perspective, Siegenthaler said that E*TRADE stock trades at a discount to the market on consensus 2018 EPS. "We think some investors have not fully bought into management's new growth/profit objectives, and we believe the errors of past management (2008 financial crisis) are still depressing the stock's valuation,” wrote the analyst. "However, if management can meet its 2018 financial targets, we believe its relative valuation discount will also contract, providing a lever for stock price outperformance." With E*TRADE stock recently trading at $48.21, up 0.15% or $0.07, Credit Suisse believes that the shares can see additional gains of roughly 16%.