E*Trade (NASDAQ: ETFC) is naming its chairman, former JPMorgan (NYSE: JPM) vice-chairman Donald Layton, to be the company's new CEO.
The stock was trading up more than 5% on the news earlier, probably because of speculation of a possible sale. The Wall Street Journalreported [subscription required] that "E*Trade and Citadel have discussed the possibility of trying to find a buyer for the home-equity portfolio, which would lift a tremendous burden off E*Trade and could pave the way for a sale of the entire company, according to people familiar with the matter."
But Mr. Layton told the Journal that selling the home-equity portfolio is not an option right now.
I think investors should, as always, be extremely cautious about buying shares in the company on takeover speculation. E*Trade's woes -- and declining share price -- are hardly an unknown entity given its status as a poster child of subprime stupidity. The fact that Ameritrade (NASDAQ: AMTD) and other well-capitalized competitors, which had expressed interest in acquiring E*Trade before its precipitous decline in value aren't stepping up with an offer, tells me all I need to know: there's really no reason to think a deal is coming any time soon.
E*Trade (NASDAQ: ETFC) yesterday reported earnings that were received well by investors. E*Trade pretty much kitchen-sinked it and reported an almost $2 billion loss but revealed details about a long-awaited turnaround plan.
E*Trade has been plagued by significant losses due to its exposure to low quality mortgages from E*Trade's banking unit. The losses spiraled into customer defections and a management shake-up which lead to this new turnaround plan.
Most of the loss reported this quarter came from sales of mortgage-related securities that lost a lot of value last year. Things had gotten so bad last November that concerns arose that E*Trade was in danger of insolvency. Hedge-fund giant Citadel invested $2.55 billion in E*Trade and bought its $3 billion asset-backed securities portfolio for a knockdown price of $800 million.
I recently wrote about E*Trade vis-a-vis Ameritrade. Now, it's E*Trade's turn.
Other salient issues surrounding the turnaround plans involve the new CEO, shoring up the balance sheet and Ameritrade's outages and effect on E*Trade.
Zack Miller is the Managing Editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.
Professional investors like to use conference call transcripts as a valuable tool in their research toolbox. These are transcribed versions of an actual conference call, usually held publicly over the phone. Instead of listening to the full call, investors can get their hands on these things and read them at their leisure. They're generally full of information asked by both analysts and professional investors.
Okay, and then, just finally, so far in January, the asset intake from E*Trade, is that still running at elevated levels versus historical trends and can you share any TFA data there versus history?
Joe Moglia, CEO, Ameritrade
I think again, for you to have clarity, I think it is appropriate for me to share that, we are not going to give specific numbers, but the numbers that we continue to see with regards to the inflow from them is significantly higher than anything we have ever seen historically.
TD Ameritrade Corp. (NASDAQ: AMTD) saw a Q1 net income growth to the tune of 65% [subscription required] as more of its retail customers placed trades in the turbulent market during the final quarter of 2007. That's not all, though: the company said 2008 earnings would be better than its previous outlook.
In perfect market fashion, the company's shares rose slightly and then tanked over 4%. AMTD shares stand at $18.08 as of 12:27 p.m., down 4.79% from yesterday's close. This, after the company reported a 65% net income rise in its Q1's fiscal period, with $240.8 million in net income or $0.40 per share and shares indicated up over 4% in premarket trading.
For the trading company's Q1 period, it reported an average of 321,736 client trades per day -- up 35% from the year-ago quarterly period. Seeing as though the final three months of 2007 saw some wild swings in tech stocks (among other sectors), TD Ameritrade's customers were on an apparent trading frenzy of sorts.
However, the company reported that client assets fell 0.8% to $300.4 billion for the quarter ended December 31st. The total includes $47 billion in cash and money market funds within all consumer client accounts. All those consumer trades, all those assets, and a brighter 2008 outlook -- and AMTD shares go down as a result. You have to love the market's interpretation of good results.
I've been writing about finance for longer than I care to admit (okay, 15 years, which feels like a long time, even if Floyd Norris might scoff). But one of the most surprising news flashes of my career has to be when I read in mid-November this year that E*Trade was tanking on concerns the company could go bankrupt.
E*Trade (NASDAQ: ETFC)? Bankrupt? I've seen discount brokerages come and go, but E*Trade has long been one of the survivors. It was up there, knocking on king Schwab's (SCHW) door, leaving competitor TD Ameritrade (AMTD) snapping at it heels. Or so I thought.
But it turns out that was the way things were before the mortgage market went bust. And before CEO Mitch Caplan decided to place a big bet on residential mortgages. Caplan, formerly head of a bank that E*Trade acquired, became CEO in 2002.
E*Trade (NASDAQ: ETFC) should have stayed with what it knows. It seems, though, that the discount broker found the profits in the mortgage business a temptation as home prices spiked up earlier in the decade. Now it is paying the price.
The firm will cut a number of businesses that are not part of its core discount broker operation, and according to CNN Money, "among the units that will be affected are E-Trade's wholesale mortgage operations and direct mortgage lending business." The mortgage business could post a loss as high as $345 million.
As part of its announcement, E*Trade cut its earnings forecast for the year by 31%.
Fee competition among discount brokers has already pushed E*Trade shares down from a 52-week high of over $26 to the current price just about $14. The news is not likely to do the stock any favors.
The discussions of consolidation among large discount brokers is also likely to resurface. Over a month ago there were rumors about an E*Trade merger with TD AmeriTrade (NASDAQ: AMTD).
Watch for a big discount broker merger. There is real reason for it now.
Douglas A. McIntyre is a partner at 247wallst.com.
ETFC lowered its EPS guidance, increased its provision for loan losses. ETFC will take additional security impairments and exit and restructure some non-core business.
Goldman Sachs (NYSE-GS) lowered its 12-month price target to $16 and removed ETFC from its Americas Buy list. Smith Barney says: "If its bank regulators took a more holistic view of ETFC's regulatory capital, it could result in a forced deleveraging."
The Wall Street Journal reported on 8/22 that TD AmeriTrade (NASDAQ: AMTD) is in merger talks with ETFC. Jana Partners & SAC Capital Advisors LLC in late May encouraged ETFC and AmeriTrade or Schwab (NASDAQ: SCHW) to consider a combination.
ETFC overall option implied volatility of 60 was above its 26-week average of 44, according to Track Data, suggesting larger price fluctuations.
Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
There had been some hope in the market that consolidation would lift discount brokerage stocks. A rumored merger of TD Ameritrade (NASDAQ: AMTD) and E*Trade (NASDAQ: ETFC) drove those stock up, but the rise was brief. After a small jump on August 22 when news leaked out, E*Trade settled back for the rest of the week.
Short sellers don't appear to put much stock in the idea that discount brokers will do well, mergers or not. Shares short in E*Trade rose 7.7 million in August, up about 20% from the previous month to 20.7 million. Shares short in Charles Schwab (NASDAQ: SCHW) moved up 3.4 million to 23.4 million.
The merger theory was driven by potential cost savings for putting together two large discount broker back offices. This would eliminate tremendous IT costs as well as lower marketing and management costs. The dark side of any merger is that it would take any competition out of the market, which could raise trading fees for customers. That could have caused the deal to be examined closely by the government. Price competition among discount houses has been considerable with some small firms even offering zero percent commissions.
Turmoil in the financial markets has also sent shares of discount brokers down. Schwab and Ameritrade dropped about the same amount as the market over the last month, and E*Trade is down over 25%.
Short sellers appear to believe that there is too much discount broker capacity to support the price cutting in the industry. For the moment, they are right.
Should you buy into these rumors? In my opinion, I don't think it makes sense to ever buy a stock simply because the media is circulating buyout, merger, or any other rumors. When considering these situations, you need to step back, study the company, and make sure you're not overpaying for the prospects of the rumor.
Shares of TD Ameritrade sold off hard when the financial sector (as a whole) got hit on rate concerns during the last two months. This trade-off has put the stock at slightly less than 18x earnings. With Charles Schwab (NASDAQ: SCHW) fetching more than 19x earnings, there seems to be a small valuation discrepancy suggesting TD Ameritrade is undervalued. Why? TD Ameritrade is more profitable, expected to grow faster than Schwab in the next year, and grew more quickly than Schwab in the last several years.
More interestingly, TD Ameritrade is currently trading for less than 16x its earnings guidance for this year and less than 13x estimates for next year's earnings! Shares of Charles Schwab, on the other hand, are fetching more than 17x next year's earnings estimates. This huge forward discount makes no sense, in my opinion, and leads me to believe TD Ameritrade is undervalued, merger or no merger.
After hitting a one year high of $21.31 in June, the stock fell sharply to a year low of $13.82 earlier this month. This morning, AMTD opened at $17.58. So far today the stock has hit a low of $16.80 and a high of $17.58. As of 11:25, AMTD is trading at $16.89, up $0.54 (3.3%). The chart for AMTD looks bearish and steady, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bullish hedged play on this stock, I would consider an October bull-put credit spread below the $15 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 11.1% return in just 2 months as long as AMTD is above $15 at October expiration. Ameritrade would have to fall by more than 11% before we would start to lose money.
AMTD hasn't been below $15 except for one day since April and has shown support around $15.50 recently. This trade could be risky if the expected rate cuts don't materialize, but even if that happens, AMTD could be protected by support just below $16, plus bargain hunters could keep the price propped up.
Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: At publication time, Brent neither owns nor controls positions in AMTD. He does control a long hedged position in ETFC.
Dubai World, a holding company for the Persian Gulf state, will purchase a 9.5% stake in MGM Mirage (NYSE: MGM), the Kirk Kerkorian controlled Las Vegas casino company, for $5B. The deal will also give Dubai World 50% ownership in CityCenter, MGM's most ambitious development project, reported the Wall Street Journal.
The Wall Street Journal reported that almost 10 months after Google Inc (NASDAQ: GOOG) acquired YouTube for $1.65B, the video-sharing site is rolling out its first advertisements in the videos.
The Financial Times (subscription required) reported that private equity firm WL Ross is looking to get involved in the subprime lending business, said the firm's owner, Wilbur Ross. WL Ross may look to acquire lenders, mortgage portfolios or even companies that service loans, Ross added.
OTHER PAPERS:
The New York Times reported that Kazakhstan's government is threatening to suspend one of the world's largest oil projects, due to environmental damage it says the work is causing in the Caspian Sea. The consortium developing the field includes Eni, Exxon Mobil Corporation (NYSE: XOM), Royal Dutch Shell (NYSE: RDS.A), ConocoPhillips (NYSE: COP), and Total SA (NYSE: TOT).
Despite solid performance from the internet-brokerage space, shares of TradeStation (NASDAQ: TRAD) have struggled over the last six months. TradeStation is a very unique broker because it offers traders the ability to automate and backtest their trading strategies.
TradeStation's stock is undervalued even though it has strong growth potential, positioning in a hot sector, and a new product that has the potential to serve as a catalyst in the next few quarters.
TradeStation currently trades for 17x earnings -- a multiple that is currently below the industry average of 22x earnings, the multiple of both TD Ameritrade (NASDAQ: AMTD) and Charles Schwab (NASDAQ: SCHW). While skeptics point to the lowly multiple of 15x earnings on ETrade (NASDAQ: ETFC), I counter their arguments with the simple fact that the company's balance sheet is loaded with debt.
MOST NOTEWORTHY: IBM Corp (IBM), Wendy's Internatioanl (WEN), Yahoo! (YHOO), Western Digital Corp (WDC) and TD AmeriTrade Holding Corp (AMTD) were today's noteworthy downgrades.
IBM Corp (NYSE: IBM) was cut to Neutral from Buy at Goldman to reflect the slowdown in domestic technology spending. Credit Suisse downgraded shares of IBM Corp to Neutral from Outperform and ThinkEquity cut IBM to Accumulate from Buy on the same rationale.
Wendy's International (NYSE: WEN) was downgraded to Underperform from Market Perform at Wachovia, citing valuation.
Needham downgraded Yahoo! (NASDAQ: YHOO) to Hold from Buy on valuation and the firm's belief that the 2H07 acceleration implied in consensus revenue forecasts could be difficult to exceed given the recent slowdown in display ad growth.
WR Hambrecht downgraded shares of Western Digital (NYSE: WDC) to Hold from Buy as the firm believes there could be more downside to forward estimates given the aggressive pricing and softer demand environment. The firm sees too many industry risks following Seagate Technology's (STX) earnings conference call.
Keefe Bruyette cut TD AmeriTrade (NASDAQ: AMTD) to Market Perform from Outperform.
OTHER DOWNGRADES:
Raymond James and BMO Capital downgraded U.S. Bancorp (NYSE: USB) to Market Perform from Outperform following its Q1 report.
Professional investors like to use conference call transcripts as a valuable tool in their research toolbox. These are transcribed versions of an actual conference call, usually held publicly over the phone. Instead of listening to the full call, investors can get their hands on these things and read them at their leisure. They're generally full of information asked by both analysts and professional investors. 
I've been writing about finance for longer than I care to admit (okay, 15 years, which feels like a long time, even if Floyd Norris might scoff). But one of the most surprising news flashes of my career has to be when I read in mid-November this year that E*Trade was tanking on 
E*Trade
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