Despite recently trading at multi-year highs, E*Trade Financial (NASDAQ:ETFC) reported Q1 results with several discouraging metrics. The recent slashing of commissions doesn’t help the expectations for the future competitive environment of the sector.
Once factoring in the numbers for recently purchased OptionsHouse, a lot of the growth metrics aren’t probably as impressive. The question is whether the stock is a buy at $34.55?
E*Trade beat Q1 estimates by $0.09 which is the standard beat over the last year. The important number though is that the actual results aren’t actually growing. The actual EPS has been stuck at or below $0.50 for a while now.
Source: Seeking Alpha Earnings
The online brokerage earns revenue on two key fronts: interest income and commissions. In both cases, the rate per unit is declining.
The key net interest margin is in decline as well despite the rate hike and somewhat counters the bull case for the stock. The margin dipped to 263 bps from 281 bps last Q1. In addition, the company outlined a scenario for higher NIM on rate hikes, if the competitive environment doesn’t alter the outcome.
Not as important as interest margins is the commissions for trades. For Q1, the average commission declined to $9.87 from $10.64 last year.
The 7% decline from last year doesn’t fully capture the pricing battle that started in March. Competitors like Fidelity and Schwab (NYSE:SCHW) cut equity trades to $4.95 causing E*Trade to lower commissions from $9.99 to $4.95 for those that trade more than 30 times per quarter. The company placed the pro forma commission rate down at only $8.10 per trade.
For Q1, E*Trade only got about 20% of $553 million in revenues from commissions. The move was long overdue and only brings the company back into line with large brokerage competitors and still far above the likes of Interactive Brokers (NASDAQ:IBKR).
The key investor takeaway is that the sector remains far too competitive to pay up for E*Trade. One should probably question whether the online broker reaches an annual EPS of $2 and makes me unwilling to buy the stock above $35.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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