I DON'T THINK PEOPLE ARE AWARE OF THE JEWEL THEY HAVE ON THEIR HANDS WITH EGRP.
MAYBE THIS WILL HELP RING A BELL ON THEIR BRAINS.
ENJOY THE READING
Hambrecht & Quist
**** Chase H&Q **** Chase H&Q **** Chase H&Q ****
Company: E*TRADE Group
Price: 22.75
Recommendation: Buy - Focus List
Notes: a, b
Date: 4/13/00
1 of 3 Back in Black! E*Trade Wipes Up the Red Ink
* E*Trade reported shocking F2Q00 results, well beyond our wildest
expectations. Despite our consensus-matching operating EPS estimate of
($0.16), E*Trade slipped in a small profit, net of non-recurring charges. Any
way you slice and dice it, these results were fantastic.
* Raising numbers across the board: F2000 revenue jumps $118 million to $1.4
billion, F2001 revenue moves up $329 million to $2 billion, F2000 EPS loss
narrows $0.20 to ($0.11), and F2001 EPS lifts $0.23 to $0.47. Our calendar
2001 EPS estimate is $0.70.
* The company's return to profitability came a full year ahead of our
expectations. A huge surge in revenue, and more importantly, strong operating
leverage, lead to the sharp upside surprise.
* Net new accounts totaled a wonderful 603,000 during the quarter. E*Trade's
marketing machine was whirling at unbelievable RPMs.
* While total customer acquisition costs were heavy at $154 million, the
spending yielded very efficient results. Acquisition cost per account was
$256, well within the sweet spot.
* We believe E*Trade's results inflicted major pain in the sides of many
traditional competitors. While assets per account are still low, E*Trade's
accounts represent the future. Watch out!
* Reiterating our Buy - Focus List rating and increasing our target price by
$4 to $44 based on better visibility on near-term profits. We believe patient
investors will ultimately be well rewarded.
1999 A 2000 E 2001 E
Q1 EPS $(0.06) $(0.12)A $0.04
Q2 EPS (0.06) 0.00A 0.07
Q3 EPS (0.10) 0.00 0.15
Q4 EPS (0.10) 0.01 0.21
FY EPS (0.32) (0.11) 0.47
FY REVS (M) 675 1,418 1,970
CY EPS (0.38) 0.05 0.70
CY P/E NM NM 33
FY Ends Dec Current Price $22.75
52-Week Range $22-72 Market Cap (M) $6,484
Shares Out (M) 285.0 Book Value $6.53
Net Cash/Share $1.30 3-Year EPS Growth NM
CY01 P/E-to-Growth NM
Smokin'! E*Trade Moves Out of the Red. During a quarter marked by heavy
market volatility and surging trading volumes, E*Trade announced record F2Q00
results, exemplifying the success of the company's electronic business model.
E*Trade reported record net revenues of $407 million for the quarter, a
sequential increase of 52% and well ahead of our estimate of $344 million.
The leveragability of E*Trade's business model kicked into high gear during
the quarter, driving gross margins to 68% from 58% during the prior quarter.
Given the exceptional leverage and efficiency, the company reported a net
profit from ongoing operations of $1.3 million (excluding non-recurring
items), or break-even on a per share basis. This marks the company's first
quarter of positive net income since F3Q98 when the company issued an
intentional moratorium on profits in order to focus on building the company's
brand and customer base ó job well done! Although we expected E*Trade to
return to profitability during the second quarter of FY2001, the company
squarely delivered on its promise nearly a year ahead of our expectations and
raised the bar once again for the industry. This is only the beginning; we
expect E*Trade to be at break-even or net profits from this point forward.
Summary of F2Q00 Results Compared to F1Q00
Source: Company reports, Chase H&Q research
The unprecedented success of the quarter was primarily driven by three key
factors: 1) stellar account growth, 2) explosive customer trading activity,
and 3) scalability and operating leverage. The strength and success of
E*Trade's catchy marketing campaign (we wish we had money coming out the
wazoo!) was clearly validated during the quarter as the company garnered a
record 603,000 net new accounts, surpassing our wildest expectations by a wide
margin. We estimated that the company would likely exceed 400,000 net new
accounts for the quarter, and even quietly dreamt about 500,000, but 600,000
never entered our minds. These results truly confirm the ongoing strength of
the powerful E*Trade brand. Although the company spent heavily ($154 million
on account acquisition related marketing) during the quarter to win new
customers, the effectiveness of E*Trade's marketing campaign was significant
enough to lower the average customer acquisition cost to $256 per net new
account compared to $263 during F1Q00. E*Trade now has an imposing customer
base of 2.6 million active accounts (including E*Trade bank accounts) with
assets in excess of $65 billion.
Strong Account Growth
Source: Company reports, Chase H&Q research
E*Trade's average daily trading volume rose from 133,000 during F1Q00 to
229,000 during F2Q00, a 72% sequential increase. We consider E*Trade's
customers to be somewhat more active than the average online brokerage
customer, but a sequential rise of 72% leads us to believe that our industry
estimate of a 45-50% sequential rise for the calendar first quarter may prove
too conservative. Although we expect industry trading volumes (not just
online) to retreat during the calendar second quarter by 15-20% and online
trading volumes to fall even further, we expect that the size of E*Trade's
customer base should afford the company a cushion during this expected
downturn. As seen below, this was evident during the calendar third quarter
of 1999 (F4Q99) when online trading volumes across the industry fell nearly
9%, yet E*Trade's average daily volume was flat. E*Trade's organic customer
growth saved the day and lead to a sharp gain in market share that quarter.
Customer Trading Activity
Source: Company reports, Chase H&Q research
Margins Swell Against the Revenue Windfall. A big jump in margins helped
to drive E*Trade's return to profitability. The scalability of E*Trade's
model came through in spades this quarter. E*Trade's gross margin hit 68%, up
from 58% last quarter. The company's Earnings Before Taxes and
Marketing (EBTM) margin jumped to 38% compared to an average of 28%
during the past five quarters. While we do not believe these exceptional
margins are sustainable over the short-term, they hint at the incredible
leverage in E*Trade's business model.
Price: 22.75
Recommendation: Buy - Focus List
Notes: a, b
Date: 4/13/00
Net Revenues and EBTM Margins
Source: Company reports, Chase H&Q research
Expectations for a Sequential Decline already built in. Even before the
recent market bloodbath, we had expected industry trading volumes to decline
in the 15-20% range during the calendar second quarter coming off two huge
sequential gains. We conservatively expect online trading volumes to possibly
fall further than market volumes, in the 25-30% range. Accordingly, we expect
E*Trade's average daily trades to decline 25% to 173,000 during F3Q00, which
still leaves the company's average daily trades above F1Q00 levels (133,000
avg. daily trades). This decline would represent 1.4 trades per average
account, compared to 2.2 during F2Q00, a full 37% decrease. We believe these
assumptions may prove too conservative. That being said, the current "Tech
Wreck" should surely damper investor enthusiasm and cause sharp losses in less
diversified portfolios. We believe some caution in our estimates is only
prudent at this time. If the market turns around as it so often has during
the past five years, then we may raise estimates. On the other hand, we
believe we have already built in estimates for a near-worse case scenario.
Profits are Back. We believe E*Trade has turned the corner on
profitability. We expect the company to remain at or near breakeven for the
next two quarters and then begin throwing off substantial earnings. After
falling a bit in F3Q00, we expect margins to begin a steady climb upwards as
the scalability and the leverage in E*Trade's model takes hold.
Margin Estimates
Source: Chase H&Q research
The EPS Climb
Source: Company reports, Chase H&Q research
Raising Estimates. Rolling in the results from F2Q00 into our model and
altering our assumptions, we are raising fiscal 2000 revenues by $118 million
to $1.4 billion. We are also raising are fiscal 2001 revenues by $329 million
to $2.0 billion. These gains are driven by a much larger customer base. By
the end of fiscal 2001, we expect E*Trade to reach 4.9 million customer
accounts compared to our prior estimate of 3.9 million. We are reducing
fiscal 2000 EPS loss by $0.20 to ($0.11) and fiscal 2001 EPS by $0.24 to
$0.47. Additionally, we expect E*Trade to report calendar 2001 EPS of $0.70
and calendar 2002 EPS of $1.38.
Given the market conditions, it is not surprising to see EGRP back in the low
twenties. However, more than ever, we believe EGRP represents an incredibly
compelling investment opportunity. We advise investors to focus on the long-
term, realizing that E*Trade is a cyclical growth company. We believe
E*Trade is ideally positioned to capitalize on the online migration of
financial services and we continue to believe that the company is still only
scratching the surface of the true opportunity. Envision the day some time
soon when you will be able to aggregate and integrate all of your various
financial accounts under a single virtual E*Trade gateway and receive
automated and intelligent asset, expense, and tax advice. We believe E*Trade
is on track to providing these types of powerful services.
Valuation is Very Attractive. Trading at only 4X our calendar 2000
revenue estimate, 3X our 2001 revenue estimate and less than 33X our 2001 EPS
estimate, we believe investors are willing to give the stock away at these
levels. That said, we realize the shares could decline further if short-term
market conditions continue to deteriorate. However, we believe those patient
enough to begin dollar-cost-averaging will be well rewarded as E*Trade is far
down the path of becoming the first blue-chip financial company born on the
Internet.
**** Chase H&Q **** Chase H&Q **** Chase H&Q ****
Company: E*TRADE Group
Price: 22.75
Recommendation: Buy - Focus List
Notes: a, b
Date: 4/13/00
Reiterating our Buy Rating. We are reiterating our Buy Focus-List rating
on the shares and raising our target price by $4 to $44. We ultimately arrive
at our new target price by applying a 40 multiple on our calendar 2001 EPS
estimate of $1.38 and discounting this back one year at a 25% discount rate.
We believe this target is easily supported by the fact that E*Trade is
currently trading at only 38% of Charles Schwab's (SCH, $50.69, Buy) multiple
of our albeit conservative 2001 revenue estimate. If EGRP had the same
calendar 2001 revenue multiple of SCH (not out of the question), the stock
would be trading at $59 a share, today! Even applying Schwab's current
multiple of the most optimistic estimate of 2001 EPS ($1.45 according to First
Call, equates to 35X) to our 2002 E*Trade EPS estimate, equates to $48 a
share. All told, we believe $44 is a very attainable target over the next
twelve to eighteen months. |
