E*Trade Financial Corp Valuation – July 2016 $ETFC

Benjamin 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 10 Companies Benjamin Graham Would Invest In Today - June 2016.  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 stock analysis showing a specific look at how E*Trade Financial Corp (ETFC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): E*Trade Financial Corporation is a financial services company. The Company provides 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, to retail investors. The Company operates in two segments: trading and investing, and balance sheet management. Its trading and investing segment offers a suite of financial products and services to individual retail investors. Its balance sheet management segment focuses on asset allocation and managing credit, liquidity and interest rate risks. Its hybrid service delivery model is delivered through various digital platforms: E*TRADE.com, E*TRADE Mobile and E*TRADE Pro. E*TRADE.com is its site that provides customers with tools, guidance, actionable ideas, research and education to take control of their finances. E*TRADE Mobile offers trading applications for various smartphones and tablets.


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Downloadable PDF version of this valuation:

ModernGraham Valuation of ETFC – July 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $6,954,309,365 Pass
2. Earnings Stability Positive EPS for 10 years prior Fail
3. Dividend Record Dividend Payments for 10 years prior Fail
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -106.16% Fail
5. Moderate PEmg Ratio PEmg < 20 25.79 Fail
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.24 Pass
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Fail
2. Dividend Record Currently Pays Dividend Fail
3. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

ETFC value chart July 2016

EPSmg $0.97
MG Growth Estimate 15.00%
MG Value $37.17
Opinion Undervalued
MG Grade D+
MG Value based on 3% Growth $14.00
MG Value based on 0% Growth $8.21
Market Implied Growth Rate 8.65%
Current Price $24.90
% of Intrinsic Value 67.00%

E*TRADE Financial Corp does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years, the poor dividend history, and the high PEmg ratio. The Enterprising Investor has concerns regarding the lack of earnings stability over the last five years, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $-2.25 in 2012 to an estimated $0.97 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 8.65% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

E*TRADE Financial Corp scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

ETFC charts July 2016

Graham Number $26.58
PEmg 25.79
PB Ratio 1.24
Dividend Yield 0.00%
TTM Dividend $0.00
Number of Consecutive Years of Dividend Growth 0


Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2016
Long-Term Debt $1,402,000,000
Total Assets $47,943,000,000
Intangible Assets $1,961,000,000
Total Liabilities $42,206,000,000
Shares Outstanding (Diluted Average) 286,680,000

Earnings Per Share History

Next Fiscal Year Estimate $1.53
Dec2015 $0.91
Dec2014 $1.00
Dec2013 $0.29
Dec2012 -$0.39
Dec2011 $0.54
Dec2010 -$0.13
Dec2009 -$11.80
Dec2008 -$10.00
Dec2007 -$34.00
Dec2006 $14.40
Dec2005 $11.20
Dec2004 $9.90
Dec2003 $5.50
Dec2002 -$5.20
Dec2001 -$7.30
Sep2000 $0.60
Sep1999 -$2.30
Sep1998 -$0.05
Sep1997 $1.01
Sep1996 -$0.07

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $0.97
Dec2015 $0.61
Dec2014 $0.40
Dec2013 -$0.70
Dec2012 -$2.25
Dec2011 -$5.81
Dec2010 -$8.76
Dec2009 -$10.73
Dec2008 -$7.37
Dec2007 -$3.57
Dec2006 $10.15
Dec2005 $6.29
Dec2004 $2.79
Dec2003 -$1.09
Dec2002 -$3.87
Dec2001 -$2.67
Sep2000 -$0.29

Recommended Reading:

Other ModernGraham posts about the company

58 Companies in the Spotlight This Week – 1/31/15
E*Trade Financial Corporation Annual Valuation – 2015 $ETFC
14 Companies in the Spotlight This Week – 1/18/14
ModernGraham Valuation: E*Trade Financial Corporation (ETFC)

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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