Business Week on EGRP
Tuesday April 04, 2000 (12:51 pm ET)
Two Reasons to Click on E*Trade
More volatile markets mean more trading revenues, and suitors may be ready to bid
By Gene Marcial, Business Week Inside Wall Street
NEW YORK, Apr. 04 (Business Week Online ) - With the market's jarring volatility, stock picking becomes an even more challenging task. The heavy downside pressure on technology and Internet stocks -- fueled in part by Judge Thomas Penfield Jackson's decision finding Microsoft guilty of violating antitrust law -- has plenty of investors rushing into the Dow-type stocks. But technology guru Mike Murphy says you can find some techs that haven't gotten hit and, in fact, have managed to stay up this year.
E*Trade Group (EGRP) is one that he thinks has enormous potential to drive higher, particularly when tech stocks start rebounding. Shares of E*Trade, a leading provider of online services for individual investors, held their own in the current near-bloodbath in techs and Net stocks. It closed at 27 a share, down 1 1/2 on Apr. 3 -- the day the Nasdaq composite index cratered 349 points, to close at 4224. E*Trade was trading at 20 in late January.
Murphy, editor of California Technology Stock Letter, thinks E*Trade deserves to be at much higher levels for a couple of reasons: Business is booming as stock-trading volumes have soared, and more important, the company is an attractive takeover target.
Spicier reason
Obviously, E*Trade is a way to play the market's volatility, since huge market volume means more revenues for the company's online trading services. E*Trade provides automated order placement and execution, and other value-added services, such as personalized portfolio tracking, real-time stock quotes, and market analyses. One of its services provides investors access to their portfolios and the market through touch-tone phones, or via interactive TV.
But playing the takeover game is the more spicy reason to accumulate E*Trade shares, says Murphy. "E*Trade is being courted by several suitors, including American Express (AXP), Wells Fargo (WFC), and Deutsche Bank," says Murphy. He notes that in the past month alone, representatives of these companies have been seen on the premises of E*Trade. Also said to be doing due diligence on the online broker, he adds, are Morgan Stanley Dean Witter (MWD) and insurance giant American International Group (AIG).
The sense of some pros tracking E*Trade is that it could double. "I think the stock could hit 60 in 12 months, or maybe even sometime this year," says Murphy.
A spokeswoman for American Express declined comment as a matter of policy. Amex already has a small online brokerage operations, which it upgraded and broadened in November. An AIG spokesman declined to comment on market speculation. E*Trade, Deutsche Bank, Morgan Stanley, and Wells Fargo couldn't be reached for comment.
Holding out?
Is E*Trade in the mood to sell? Murphy thinks that Chairman and CEO Christos Cotsakos will consider selling only at a substantial premium to the company's current market cap of $7.9 billion. Cotsakos is under little pressure to get a deal done, he adds, and "so we'd be surprised if he isn't holding out for an offer of at least 60 a share." Its business is very viable, notes Murphy, and he thinks the company will start making money next year.
Business Week (Part 2)
Murphy figures that E*Trade will surprise analysts in its March quarter, by posting a loss of 14 cents to 15 cents a share, vs. the Street consensus of an 18-cent loss. For its fiscal year ending Sept. 30, 2000, Murphy expects the company to also beat Street estimates of a per-share loss of 50 cents. Murphy estimates the loss at just 25 cents. In fiscal 2001, the consensus is for continued loss, but Murphy sees E*Trade posting a 23-cent profit.
"If there is any company that can catch up with Charles Schwab in the number of customers, it's E*Trade," he says. It added 330,000 accounts in the quarter ended Dec. 31, for a total of 1.88 million online accounts, and it has $44.1 billion in assets under management. E*Trade has been consistently adding 280,000 to 380,000 new accounts per quarter. Schwab, on the other hand, added 388,600 new accounts in the same December quarter, for a total of 3.3 million online customers. E*Trade customers are doing 190,000 trades a day, while Schwab accounts trade in the low 200,000s.
"Clear winner"
Analyst Bryan Keane of Prudential Securities, who rates the stock a strong buy, thinks E*Trade is a "clear winner on the Internet," with the ability to achieve long-term gross margins of 60% to 70% and operating earnings of 20% to 30%. Revenue growth of 50% is sustainable for the next few years, he adds, as the company continues to diversify in many financial and e-commerce products.
Chase Hambrecht & Quist analyst Gregory Smith, who rates E*Trade a buy, says the stock remains his favorite name among online brokers. One reason: E*Trade is rapidly integrating its brokerage and banking products, which paves the way for tremendous cross-selling opportunities among the company's brokerage customers.
Whether you look at E*Trade's core business or its takeover potential, the company appears to be doing the right things to become the leading online financial-service company.
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