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E*Trade Financial
6/9/2002
Attractive at $5.70.
Price target: $10.00
By Chris Stallman
| E-mail
The last
few years haven't been easy for online brokers. With more and
more people looking for safer investments than stocks, the online
brokers are seeing their trading volumes dwindle. And with fewer
people making trades, it gives the online brokers lower revenues.
But
despite this, I think there are still a few brokerage stocks that
are appealing. One of these is E*Trade Financial. As a few of you
remember, E*Trade hit an all-time high of $62/share in early 1999.
Since then, it has seen its stock drop to its current level of $5.70/share.
The biggest reason for this is the hurting economy.
With fewer people investing, E*Trade has seen a drop in their revenues.
However, because they have branched out to other financial arenas
(online banking, ATM's, etc..), they have been able to keep
the company financially healthy. And by taking their focus off the
online brokerage sector, they have been able to remain profitable
by focusing on other key business models.
That's not to say that they aren't an online broker
anymore. They still are and it still accounts for a lot of their
revenues. But they have positioned themselves so that a downturn
in the economy won't wreck the company. In fact, analysts are
forecasting a profit of $0.45/share for 2002. This means that E*Trade
is currently valued at 12.7x FY2002 earnings.
What
I Like About the Stock
- It's
positioned for a turnaround - with trading volume at pretty low
levels, I feel that the stock has hit a bottom. Any turnaround
in the economy or stock market will greatly increase the company's
top and bottom lines.
- It's
not a bad long-term investment - because they have taken measures
to diversify their business operations, I think that even if the
market doesn't recover now, the company will still remain
strong for the next couple years.
- Consistently
good earnings - E*Trade has met or beet analysts' estimates
for the last 4 quarters. This is a sign that the company can evolve
to meet the current economic conditions.
What I Don't Like About
the Stock
- Debt
- I don't like the levels of debt that E*Trade has taken on.
They currently have $4 billion worth of debt and this can hinder
their growth in the future
- Volatile
- The stock has been very volatile over the last year and a half.
It staged a rally from $5/share to $15/share and then back down
to $5/share. This gives it a beta relative to the market of 3.74
so it's a pretty risky stock.
All in all, I think E*Trade is very attractive at these
levels. However, don't be surprised if it drops as low as $5.00/share.
But for the most part, I think the stock has reached a bottom and
has very interesting upside potential. I see the stock reaching
$10.00/share in the next two years.
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