Special Bulletin: E*Trade Financial (ETFC) October 21, 2016
E*Trade Financial (ETFC) reported blowout earnings yesterday afternoon. The company reported 51 cents earnings per share (EPS) for the third quarter of fiscal 2016 (December year-end), while the market was expecting 39 cents EPS.* Excluding special items, core earnings were 44 cents per share.
Revenue was $486 million, while the market expected $471 million.
E*Trade offers retail investors financial brokerage and banking products and services. Third quarter results included the recent acquisition of OptionsHouse.
The Conundrum with ETFC
There are pros and cons to holding ETFC shares:
Pro: The company keeps reporting strong quarters with upside earnings surprises, causing consensus estimates to ratchet upwards. In April 2016, full-year earnings were expected to grow 31.6%. Last week, growth was expected to be 45.3%. That number rose to 51.3% in recent days, and could easily be revised upward again, as analysts continue to reevaluate their estimates.
Con: Last week, analysts expected E*Trade’s 2017 EPS to grow just 3.5%, and this morning, that number reflects a decline of 0.6%.
Con: The share price is approaching significant upside price resistance at 31, where the stock traded repeatedly in 2015. It would be uncommon for ETFC to rise to 31 and keep rising without first trading sideways for a while. At this point, there is no excitement in the 2017 earnings estimate to help the stock break past 31.
Pro: As I’ve mentioned in my weekly updates, E*Trade is the subject of takeover speculation, and would frankly be an attractive and profitable acquisition. However, such a takeover might never materialize, and unlike the potential takeover of WellCare Health Plans (WCG), which is also in the Cabot Undervalued Stocks Advisor Growth Portfolio, there’s no specific timeframe with which to expect the potential M&A activity.
Should you hold ETFC or sell?
Hold ETFC until the price reaches 30.50; then sell at 30.50. If the sale of ETFC happens imminently, consider buying Amazon (AMZN) on the current pullback; American International Group (AIG), Applied Materials (AMAT), which just completed a double-bottom chart pattern, or Vertex Pharmaceuticals (VRTX), a great “buy low” opportunity.
I will continue to monitor earnings estimates, and will not be prejudiced against recommending ETFC in the future, if projected earnings growth becomes attractive again.
ETFC will probably continue to trade between 28 and 31 in the near future.
Correction:
The news source from which I acquired the date of Robert Half’s (RHI) upcoming third quarter earnings report, was incorrect. The true date for the earnings report will be October 26, in the afternoon. Mea culpa.
Update: In my weekly update on October 11, 2016, I mentioned that Palo Alto Networks (PANW) might pull back to price support around 140. The pullback occurred, and the stock bounced at about 145. If you’re waiting to buy PANW for a trade, 145 is the price at which you should jump in.
*Consensus earnings estimates provided by Thomson Reuters and by Zacks will commonly differ by a penny or so. I use the Thomson Reuters numbers.
Note: While analysts and journalists virtually always compare quarterly results to the year-ago quarter, I have personally found no value in doing so. Generally speaking, disparities between last year’s and this year’s earnings have long since been factored into share prices. In my experience, it’s the surprise of actual quarterly results vs. consensus estimates that moves stocks in the short-term; and it’s the full-year earnings growth rate that moves stocks over the longer-term.