Banking & Finance

Selecting A Peak Buyout Price for E*TRADE (ETFC, AMTD, SCHW, GS, MS)

Jon C. Ogg

24/7 Wall St. has long considered E*TRADE Financial Corporation (NASDAQ: ETFC) as a buyout candidate in the world of online brokerage firms.  The company made some big gambles in an effort to resemble a bank in years past and its mortgage and loan portfolio really acted as a huge drag during the recession.  Now the company is under review after Citadel went activist on it and word is out that TD AMERITRADE Holding Corporation (NASDAQ: AMTD) is meeting over whether or not it will make an outreach for the company.  When news came out that Citadel was pressuring the company last week, our first outlook was that any premium may be an overvaluation.  What we want to find now is just how much premium a buyer can afford to pay before shareholders revolt.

We have gone as far in the past saying that Goldman Sachs Group Inc. (NYSE: GS) might consider making a play for E*TRADE.  That is just not realistic at all in today’s post-blowup financial world. After all, Goldman Sachs is a bank holding company that technically has no real banking operations for the public.  The time has come and gone for that to be a reality.  The other two contenders for making a play are Charles Schwab Corporation (NYSE: SCHW) and Morgan Stanley (NYSE: MS).  Realistically, Morgan Stanley might have a hard time getting approved by regulators to even consider making an acquisition after the financial mess.

One big problem in analyzing the valuation of any of these companies is that there are many legacy accounts that can skew calculated values if you just consider current or active accounts.  There is also the 80/20 rule in business that is probably a 90/10 rule in online brokerages… instead of 80% of the value being based upon 20% of total clients, it may be that 90% of the real value comes from only 10% of the clients.  We have tried to highlight the different calculations from to firm as a result of the reported variations from firm to firm.

E*TRADE Financial Corporation (NASDAQ: ETFC) was screened with a pre-earnings return on equity (ROE) of only about 1.6% and a forward price to earnings multiple of 15.8.  E*TRADE’s market cap was $3.45 billion after the shares recently closed at $15.64 against a 52-week range of $12.24 to $18.13.  The problem is that it just is not cheap.  The company now claims some 4.3 million customer accounts, which included 2.8 million brokerage accounts.  We continue to value these on a brokerage account basis today and its $3.8 billion market cap after today’s 6% gain to $16.64 give a per account value of close to $1,350.00 today.

TD AMERITRADE Holding Corporation (NASDAQ: AMTD) has a return of equity (ROE) of 15.2% and a forward price to earnings multiple of 15.  AMERITRADE’s market cap is $11.2 billion. The shares recently closed at $19.61.  The 52-week price range is $14.42 to $22.85.  TD AMERITRADE has just over 8.2 million total accounts but calls its total funded accounts as being 5.59 million.  If we just use the funded accounts we have a value implication of nearly $2,000.00 per account.

Charles Schwab Corp. (NYSE: SCHW) has a forward price to earnings multiple of 14.9.  Its market cap is $18.6 billion.  The shares recently closed at $15.44.  The 52-week price range is $12.51 to $19.63.  Schwab claims some 8.1 million client brokerage accounts, implying closer to a $2,200.00 per account value.