E*Trade Financial Corporation Annual Valuation – 2015 $ETFC

220px-ETrade.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – December 2014.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how E*Trade Financial Corporation (ETFC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): 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 6 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

Key Data:

Recent Price $24.19
MG Value $15.25
MG Opinion Overvalued
Value Based on 3% Growth $5.74
Value Based on 0% Growth $3.37
Market Implied Growth Rate 26.29%
PEmg 61.09
PB Ratio 1.32

Balance Sheet – September 2014

Total Debt $2,665,000,000
Total Assets $45,530,000,000
Intangible Assets $1,986,000,000
Total Liabilities $40,155,000,000
Outstanding Shares 294,400,000

Earnings Per Share

2014 $1.00
2013 $0.29
2012 -$0.39
2011 $0.54
2010 -$0.13
2009 -$11.85
2008 -$10.00
2007 -$34.00
2006 $14.40
2005 $11.20
2004 $9.20

Earnings Per Share – ModernGraham

2014 $0.40
2013 -$0.71
2012 -$2.26
2011 -$5.82
2010 -$8.78
2009 -$10.75

Dividend History
E*Trade Financial does not pay a dividend.


E*Trade Financial Corporation is not suitable for either the Defensive Investor or the Enterprising Investor.  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.  The Enterprising Investor is concerned with the lack of earnings growth or stability over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from a loss of $8.78 in 2010 to an estimated $0.40 for 2014.  This level of growth does not support the market’s implied estimate of 26.29% growth, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.

Be sure to check out previous ModernGraham valuations of E*Trade Financial Corporation (ETFC) for greater perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on E*Trade Financial Corporation (ETFC)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in E*Trade Financial Corporation (ETFC) at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.






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