A month has gone by since the last earnings report for E*TRADE Financial Corporation . Shares have lost about 5.2% in the past month, underperforming the market.
Will the recent negative trend continue leading up to its next earnings release, or is ETFC due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
E*TRADE Q4 Earnings Beat on High Revenues, DARTs Up
E*TRADE recorded positive earnings surprise of 3.2% in fourth-quarter 2017. Adjusted earnings of 64 cents per share easily surpassed the Zacks Consensus Estimate of 62 cents. Results exclude tax expense related to tax reform and other one-time items.
Results reflected increased net revenues and a benefit to provision for loan losses. DARTs increased year over year. Further, the quarter witnessed rise in customer accounts and reduced delinquencies. However, elevated operating expenses were on the downside.
Including tax expense $44 million or 16 cents per share and other non-recurring items, E*TRADE’s net income for the quarter came in at $129 million or 48 cents per share compared with $127 million or 46 cents reported in the prior-year quarter.
For full-year 2017, adjusted net income was $627 million or $2.19 per share, lagging the Zacks Consensus Estimate of $2.28. Including tax expense $13 million or 4 cents per share and other non-recurring items, net income came in at $614 million or $2.15 per share compared with $552 million or $1.98 in the prior year.
Revenues Escalate, Expenses Flare Up
For full-year 2017, total net revenues climbed 22.2% year over year to $2.37 billion, driven by a rise in net interest income as well as non-interest income. Moreover, results outpaced the Zacks Consensus Estimate of $2.36 billion.
Net revenues for the reported quarter came in at $637 million, surpassing the Zacks Consensus Estimate of $633.1 million. Revenues were up 25.1% from the year-ago quarter.
Net interest income surged 45.5% on a year-over-year basis to $419 million, primarily due to higher interest income and lower interest expense. Net interest margin was 2.92%, up from 2.60% in the prior-year quarter.
Non-interest income of $218 million edged down 1.4% from the year-ago quarter. The reported quarter recorded lower commissions, partially offset by higher fees and service charges.
Total non-interest expenses flared up 13% year over year to $364 million. The increase was due to rise in almost all the expense components.
Improved Trading Performance
Total DARTs increased 26% year over year to 236,000 in the reported quarter, including 29% in derivatives. At the end of the quarter, E*TRADE had 5.4 million customer accounts (including 3.6 million brokerage accounts), up 4% from the year-ago quarter.
Additionally, DARTs for the full year were 214,000, up 30.5% year over year, including 30% in derivatives.
Further, the company’s total customer assets were $383.3 billion, up 23% year over year. Brokerage-related cash grew 3% year over year to $52.9 billion.
Notably, customers were net buyers of about $2.3 billion of securities compared with net sellers of $0.8 billion in the prior-year quarter. Net new brokerage assets totaled $3.2 billion, in line with the year-earlier quarter.
Credit Quality Marks Significant Improvement
Overall, credit quality improved at E*TRADE. Net recoveries were $6 million in the reported quarter compared with $4 million recorded in the prior-year quarter. Also, the company witnessed a provision benefit of $26 million compared with $18 million in the year-ago quarter.
Allowance for loan losses plummeted 66.5%, year over year, to $74 million. Additionally, total special delinquencies (30-89 days delinquent) dropped 14% year over year to $98 million in E*TRADE’s entire loan portfolio. Notably, total delinquent loans dipped 15.6% year over year to $249 million.
Balance Sheet and Capital Ratios
E*TRADE’s loan portfolio totaled $2.7 billion at the end of the reported quarter, down from $3.6 billion as of Dec 31, 2016.
As of Dec 31, 2017, E*TRADE had total assets of $63.4 billion compared with $49 billion as of Dec 31, 2016.
The company’s capital ratios remained strong. As of Dec 31, 2017, E*TRADE reported Tier 1 risk-based capital ratio of 39.5% compared with 38.3% witnessed in the year-ago quarter. Total risk-based capital ratio was 43.8%, down from 44% in the prior-year quarter. Tier 1 leverage ratio was 7.4% compared with 7.8% in the year-ago quarter.
During 2017, E*TRADE repurchased 8.5 million shares at an average price of $42.62 for a total cost of $362 million. During the reported quarter, the company repurchased 3.9 million shares at an average price of $44.97, for a total cost of $175 million.
Other Development
E*TRADE also announced the acquisition of one million retail brokerage accounts with $18 billion in customer assets from Capital One Financial Corporation. The cash deal is worth $170 million.
The deal is expected to be neutral to earnings in 2018 and accretive by 6 cents in 2019 on achievement of full run-rate synergies. Existing corporate cash is likely to fund the transaction. The acquisition, which awaits certain customary closing conditions and regulatory approvals, is anticipated to conclude in third-quarter 2018.
Outlook
For 2018, management targets an adjusted operating margin of 43%, with the assumption of no increase in the Fed benchmark rate from current levels and incorporates management plans to increase investments in the business over the course of 2018, including a ramp-up in marketing spend to a total of around $200 million and some level of deposit repricing.
Management expects net interest margin (NIM) to be in the low-to-mid 280s in 2018, with assumption of customer margin balances to be flat at current levels and no Fed funds increases during the year.
Management projects effective tax rate to be approximately 27% for 2018, with some quarterly volatility due to the impact of share-based compensation awards and future revaluations of state deferred tax assets.
For 2018, the TCA acquisition deal is likely to be neutral to bottom-line results, including cost of the issue of preferred stock which is planned to fund the transaction. For 2019, management expects 2 cents earnings accretion with an IRR of approximately 20%, assuming modest expense synergy. Additionally, when full synergies are achieved in 2019, management expects TCA to contribute around $80 million in revenue and be slightly accretive to overall operating margins. For first-quarter 2018, management expects the distribution from the broker-dealer to be $125 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been three revisions higher for the current quarter, while looking back an additional 30 days, we can see even more upward momentum. There have been only two moves up in the last two months. In the past month, the consensus estimate has moved up by 6.4% due to these changes.
VGM Scores
Currently, ETFC has a poor Growth Score of D, however its Momentum is doing a lot better with an A. However, the stock was also allocated a grade of C on the value side, putting it in the middle 20% 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.
Our style scores indicate that the stock is more suitable for momentum investors than value investors.
Outlook
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise ETFC has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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Why Is E*TRADE Financial (ETFC) Down 5.2% Since its Last Earnings Report?
A month has gone by since the last earnings report for E*TRADE Financial Corporation . Shares have lost about 5.2% in the past month, underperforming the market.
Will the recent negative trend continue leading up to its next earnings release, or is ETFC due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
E*TRADE Q4 Earnings Beat on High Revenues, DARTs Up
E*TRADE recorded positive earnings surprise of 3.2% in fourth-quarter 2017. Adjusted earnings of 64 cents per share easily surpassed the Zacks Consensus Estimate of 62 cents. Results exclude tax expense related to tax reform and other one-time items.
Results reflected increased net revenues and a benefit to provision for loan losses. DARTs increased year over year. Further, the quarter witnessed rise in customer accounts and reduced delinquencies. However, elevated operating expenses were on the downside.
Including tax expense $44 million or 16 cents per share and other non-recurring items, E*TRADE’s net income for the quarter came in at $129 million or 48 cents per share compared with $127 million or 46 cents reported in the prior-year quarter.
For full-year 2017, adjusted net income was $627 million or $2.19 per share, lagging the Zacks Consensus Estimate of $2.28. Including tax expense $13 million or 4 cents per share and other non-recurring items, net income came in at $614 million or $2.15 per share compared with $552 million or $1.98 in the prior year.
Revenues Escalate, Expenses Flare Up
For full-year 2017, total net revenues climbed 22.2% year over year to $2.37 billion, driven by a rise in net interest income as well as non-interest income. Moreover, results outpaced the Zacks Consensus Estimate of $2.36 billion.
Net revenues for the reported quarter came in at $637 million, surpassing the Zacks Consensus Estimate of $633.1 million. Revenues were up 25.1% from the year-ago quarter.
Net interest income surged 45.5% on a year-over-year basis to $419 million, primarily due to higher interest income and lower interest expense. Net interest margin was 2.92%, up from 2.60% in the prior-year quarter.
Non-interest income of $218 million edged down 1.4% from the year-ago quarter. The reported quarter recorded lower commissions, partially offset by higher fees and service charges.
Total non-interest expenses flared up 13% year over year to $364 million. The increase was due to rise in almost all the expense components.
Improved Trading Performance
Total DARTs increased 26% year over year to 236,000 in the reported quarter, including 29% in derivatives. At the end of the quarter, E*TRADE had 5.4 million customer accounts (including 3.6 million brokerage accounts), up 4% from the year-ago quarter.
Additionally, DARTs for the full year were 214,000, up 30.5% year over year, including 30% in derivatives.
Further, the company’s total customer assets were $383.3 billion, up 23% year over year. Brokerage-related cash grew 3% year over year to $52.9 billion.
Notably, customers were net buyers of about $2.3 billion of securities compared with net sellers of $0.8 billion in the prior-year quarter. Net new brokerage assets totaled $3.2 billion, in line with the year-earlier quarter.
Credit Quality Marks Significant Improvement
Overall, credit quality improved at E*TRADE. Net recoveries were $6 million in the reported quarter compared with $4 million recorded in the prior-year quarter. Also, the company witnessed a provision benefit of $26 million compared with $18 million in the year-ago quarter.
Allowance for loan losses plummeted 66.5%, year over year, to $74 million. Additionally, total special delinquencies (30-89 days delinquent) dropped 14% year over year to $98 million in E*TRADE’s entire loan portfolio. Notably, total delinquent loans dipped 15.6% year over year to $249 million.
Balance Sheet and Capital Ratios
E*TRADE’s loan portfolio totaled $2.7 billion at the end of the reported quarter, down from $3.6 billion as of Dec 31, 2016.
As of Dec 31, 2017, E*TRADE had total assets of $63.4 billion compared with $49 billion as of Dec 31, 2016.
The company’s capital ratios remained strong. As of Dec 31, 2017, E*TRADE reported Tier 1 risk-based capital ratio of 39.5% compared with 38.3% witnessed in the year-ago quarter. Total risk-based capital ratio was 43.8%, down from 44% in the prior-year quarter. Tier 1 leverage ratio was 7.4% compared with 7.8% in the year-ago quarter.
During 2017, E*TRADE repurchased 8.5 million shares at an average price of $42.62 for a total cost of $362 million. During the reported quarter, the company repurchased 3.9 million shares at an average price of $44.97, for a total cost of $175 million.
Other Development
E*TRADE also announced the acquisition of one million retail brokerage accounts with $18 billion in customer assets from Capital One Financial Corporation. The cash deal is worth $170 million.
The deal is expected to be neutral to earnings in 2018 and accretive by 6 cents in 2019 on achievement of full run-rate synergies. Existing corporate cash is likely to fund the transaction. The acquisition, which awaits certain customary closing conditions and regulatory approvals, is anticipated to conclude in third-quarter 2018.
Outlook
For 2018, management targets an adjusted operating margin of 43%, with the assumption of no increase in the Fed benchmark rate from current levels and incorporates management plans to increase investments in the business over the course of 2018, including a ramp-up in marketing spend to a total of around $200 million and some level of deposit repricing.
Management expects net interest margin (NIM) to be in the low-to-mid 280s in 2018, with assumption of customer margin balances to be flat at current levels and no Fed funds increases during the year.
Management projects effective tax rate to be approximately 27% for 2018, with some quarterly volatility due to the impact of share-based compensation awards and future revaluations of state deferred tax assets.
For 2018, the TCA acquisition deal is likely to be neutral to bottom-line results, including cost of the issue of preferred stock which is planned to fund the transaction. For 2019, management expects 2 cents earnings accretion with an IRR of approximately 20%, assuming modest expense synergy. Additionally, when full synergies are achieved in 2019, management expects TCA to contribute around $80 million in revenue and be slightly accretive to overall operating margins. For first-quarter 2018, management expects the distribution from the broker-dealer to be $125 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been three revisions higher for the current quarter, while looking back an additional 30 days, we can see even more upward momentum. There have been only two moves up in the last two months. In the past month, the consensus estimate has moved up by 6.4% due to these changes.
E*TRADE Financial Corporation Price and Consensus
E*TRADE Financial Corporation Price and Consensus | E*TRADE Financial Corporation Quote
VGM Scores
Currently, ETFC has a poor Growth Score of D, however its Momentum is doing a lot better with an A. However, the stock was also allocated a grade of C on the value side, putting it in the middle 20% 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.
Our style scores indicate that the stock is more suitable for momentum investors than value investors.
Outlook
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise ETFC has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.