ModernGraham Valuation: E*Trade Financial Corporation (ETFC)

moneyCompany Profile (obtained from Google Finance): E*TRADE Financial Corporation (E*TRADE) is a financial services company, which provides online brokerage and related products and services primarily to individual retail investors under the brand E*TRADE Financial. The Company also provides investor-focused banking products, primarily sweep deposits and savings products, to retail investors. E*TRADE operates in two segments: trading and investing and balance sheet management. Trading and investing includes retail brokerage products and services; investor-focused banking products; market making, and corporate services. Balance sheet management includes the management of asset allocation and credit, liquidity and interest rate risk; loans previously originated or purchased from third parties, and customer cash and deposits. The Company’s subsidiaries include E*TRADE Bank, E*TRADE Securities LLC, E*TRADE Clearing LLC and E*TRADE Capital Markets, LLC.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass all 6 of the following tests: Score = 2/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  3. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  5. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 1/3

  1. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  2. Dividend Record – currently pays a dividend – FAIL
  3. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

Balance Sheet – 9/30/2013 

Total Debt $3,052,800,000
Total Assets $45,547,500,000
Intangible Assets $1,791,800,000
Total Liabilities $40,717,900,000
Outstanding Shares 287,180,000

Earnings Per Share

2013 (estimate) $0.26
2012 -$0.39
2011 $0.54
2010 -$0.13
2009 -$11.80
2008 -$15.80
2007 -$34.00
2006 $14.40
2005 $11.60
2004 $9.20
2003 $5.50

Earnings Per Share – ModernGraham 

2013 (estimate) -$0.71
2012 -$2.64
2011 -$6.59
2010 -$9.92
2009 -$12.25
2008 -$9.29


E*Trade Financial Corporation is not suitable for either the Defensive Investor or the Enterprising Investor.  While the company has improved its earnings situation in the recent history, it lacks the level of stability that we would like to see, and does not pay dividends.  Value investors seeking to follow Benjamin Graham’s methods should research other opportunities, beginning with a review of ModernGraham’s list of companies that pass these requirements.  From a valuation perspective, the company has improved its EPSmg (normalized earnings) from -$12.25 in 2009 to an estimated -$0.71 for 2013.  This is solid improvement, however, the ModernGraham valuation model does not determine a value for companies that exhibit negative EPSmg.  As a result, investors must turn to the balance sheet or other methods to determine value because the company’s value does not presently come from the earnings or dividends, but must remember that avoiding speculating is one of the 7 Key Tips to Value Investing.

What do you think?  What value do you place on E*Trade Financial Corporation?  Is the company suitable only for Enterprising Investors?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in E*Trade Financial Corporation (ETFC) or any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill

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