Monday, November 12, 2007

ETrade (NASDAQ:ETFC): Color on news

We have couple of firms commenting on ETrade (NASDAQ:ETFC) after the co said on Friday it expects further write-downs on its $3 billion asset-backed securities portfolio and the U.S. Securities and Commission is investigating.

- Banc of America is lowering their tgt to $10.50 from $12 while keeping Neutral rating on the stock.

- Citigroup is lowering their rating on ETFC to Sell from Hold and cutting tgt to $7.50 from $13 saying the continued negative news flow about charges resulting from its mortgage & CDO exposure, an SEC inquiry, and continued deterioration in its financial condition, all increase the likelihood of significant client attrition.

Firm estimates that trying to liquidate E*Trade's loan & ABS portfolio would result in over $5b of losses (more than wiping out tangible equity). Based on accounting convention, E*Trade is not required to mark-to-market certain loans and securities. However, in the event that it has to sell these assets as a result of losing its funding sources (e.g. deposits & repo lines), losses could be realized. Citi's haircuts to arrive at the $5b loss estimate include 10% on 1st lien loans, 20% on HELOCs, and 25% on its ABS portfolio.

Theylowering 07/08/09 earnings est to $0.31, $0.90, $0.90. the tgt of $7.50, includes a 15% probability of bankruptcy.

Notablecalls: Citigroup's call is titled "Bankruptcy Risk Cannot Be Ruled Out". That's why we have the stock down 30% in pre-market and not 10% like it should be following Friday's news. And it would still be a bounce candidate!

This stuff sounds like '00-'02 when Guy Moszkowski was covering ETFC for Citi (then Salomon). Think he downgraded the stock to Sell around $4. Man, this is clueless stuff. Prashant, you should have seen this coming and should now be looking for reasons to UPGRADE this stock, not downgrade. Phew!

It's a buy around $6. Even if the mortgage positions end up worthless, ETFC is worth a lot more than what it is selling for right now.

10 comments:

dcxavier said...

Guess it depends on how you view ETFC today. Are they an online broker with a bank/mortgage business on the side, or are they a bank/mortgage business with an online broker on the side?

Liquidity issues could drive them to BK. This reminds me a lot of the junk bond problems in the 1980's, when the market for them dried up.

notablecalls said...

ETFC has solid online ops that are worth several times more than the current quote.

dcxavier said...

ETFC is in the $3's now. Are you a buyer?

I've learned from experience that liquidity squeezes are the most dangerous conditions around. Rational or not, they can drive good businesses to BK.

newequity said...

i hope you didnt buy at open or you would be down huge.

LLJ said...

ETrade will be fine if account holders stay the course and don't panic. Their capitalization is high enough to get them through this. It's all up to existing account holders. Don't panic, and ETrade is a big time buy.

dcxavier said...

I had a large bid at $3.41 yesterday, but couldn't monitor it because of family commitments. It only reached $3.46, now up strongly in premarket. That's the way my luck goes these days.

Don Tiberone said...

They have access to the Fed Window so there won't be any liquidity problems.

Tai said...

Whether or not you guys ended up making money last week - you might enjoy this video with the famous chimp from those Super Bowl ads http://youtube.com/watch?v=6uSL1rilsWg

Tai said...

Whether or not you guys ended up making money last week - you might enjoy this video with the famous chimp from those Super Bowl ads http://youtube.com/watch?v=6uSL1rilsWg

TonnyLy said...

Hi! What a great blog. I do know something about the company you are talking about here. I learned it from this great site www.pissedconsumer.com. Etrade specializes in different financial services: trading and investing, retirement, banking and credit cards, planning, mortgage and home equity. Company's major business is on-line discount stock brokerage service, which I unfortunately decided to get engaged with.