Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Most Undervalued Companies for the Defensive Investor – December 2014.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how E*Trade Financial Corporation (ETFC)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â E*Trade Financial Corporation is a financial services company and an online brokerage industry. The Company offers solutions for individual investors and stock plan participants. The Company offers its customers to take control of its financial futures by providing the products, tools, services and advice they need to meet their near and long term investing goals. The Company provides these services to customers both online and through their network of customer service representatives and Financial Consultants – over the phone and in person at 30 Company branches across the United States. The Company operates a bank with the primary purpose of maximizing the value of deposits generated though its brokerage business.
Defensive Investor – must pass all 6Â following tests: Score = 2/6
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Earnings Stability – positive earnings per share for at least 10 straight years -Â FAIL
- Dividend Record – has paid a dividend for at least 10 straight years -Â FAIL
- 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 -Â FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â PASS
Enterprising Investor – must pass all 3Â of the following tests or be suitable for a defensive investor: Score = 1/3
- Earnings Stability – positive earnings per share for at least 5 years -Â FAIL
- Dividend Record – currently pays a dividend -Â FAIL
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|Value Based on 3% Growth||$5.74|
|Value Based on 0% Growth||$3.37|
|Market Implied Growth Rate||26.29%|
Balance Sheet – SeptemberÂ 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
E*Trade Financial does not pay a dividend.
E*Trade FinancialÂ CorporationÂ is not suitableÂ for either the Defensive Investor or the Enterprising Investor. Â The Defensive Investor is concerned with the, insufficient earnings stability or growth over the last ten years, short dividend history, and the high PEmg ratio. Â The Enterprising Investor is concerned with the lack of earnings growth or stability over the last five years. Â As a result, value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should exploreÂ other opportunities. Â As for a valuation,Â the company appears to be overvaluedÂ after growingÂ its EPSmg (normalized earnings) from a loss of $8.78 in 2010 to an estimated $0.40 for 2014. Â This level of growth does not support the market’s implied estimate of 26.29% growth, leading the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well belowÂ the price.
Be sure to check out previous ModernGraham valuations of E*Trade Financial Corporation (ETFC)Â for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on E*Trade Financial Corporation (ETFC)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold aÂ position in E*Trade Financial Corporation (ETFC)Â at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.