E*Trade's 3Q Disappoints, Acquisition Has Investors Concerned

E*Trade Financial (ETFC) shares ended Friday’s trading session under pressure thanks to a poor showing in the third quarter and an announcement of an acquisition that dimmed hopes it would look for a buyer.

Shares of the New York online broker closed down 1.12% or $0.49 to $43.20, adding to declines it has seen so far in October. In early action it's trading up less than 1%. The dip in the stock came after the company posted earnings per share for the third quarter that came in at $0.49 a share, lower than the Wall Street expectations, which stood at $0.51 a share and 3% under what it did in the year-ago third quarter. Revenue of $599 million was able to surpass Wall Street, which expected it to come in at $598 million.

But the disappointments didn’t end there. During the three months ended in September, the discount broker said it opened 26,000 net new brokerage accounts, down from 162,000 a year ago. Net new brokerage assets were reported at $2.2 billion, which was also lower than the $5.4 billion it lodged in last year’s third quarter. It did end the third quarter with total customer assets of $365.3 billion, higher than the $307 billion it had at the end of last year’s third quarter. That didn’t prevent E*Trade Chief Executive Karl Roessner from playing up the results for the third quarter saying “it was another great quarter” for the brokerage.

In addition to disappointing quarterly numbers, the announcement that E*Trade is acquiring Trust Company of America, a provider of technology and custody services to registered investment advisers, contributed to investor disatisfaction. E*Trade is paying $275 million in cash for the company which has around $17 billion in institutional assets under custody and more than 180 active RIAs using its platform as of September. The transaction raised eyebrows among some Wall Street analysts who are skeptical of the deal given the companies don’t have much in common. In a rebuttal to critics, Roessner said E*Trade is still focused on organic growth, but TCA is a way to diversify its revenue and stop customers from jumping ship to access the types of products TCA has.

More concerning to investors than a ill-suited acquisition is the possibilty E*Trade is no longer interested in finding a buyer. That’s exactly what JMP Securities analyst Devin Ryan said in a research report that investors betting on a sale were likely disappointed. “We think management is clear that while it will continue to put in its best effort to reach stated goals, and more, E*TRADE’s Board still has a fiduciary responsibility to shareholders and will continually assess the best way to maximize long-term value,” wrote the analyst in a research report covered by Barron’s. On the other hand, Ryan remained confident in the stock saying, “We do not believe a sale is imminent, nor do we think a small complementary acquisition would detract from the firm’s value.”