Leave It to E*TRADE

The discount brokerage industry needed some good news heading into last night's E*TRADE (Nasdaq: ETFC  ) fourth-quarter report.

Charles Schwab (Nasdaq: SCHW  ) and TD*AMERITRADE (Nasdaq: AMTD  ) missed Wall Street's targets a week ago, when they posted year-over-year declines in profitability.

The gloomy tidings vindicated Goldman Sachs' call to lower its price target on the three brokers, as well as optionsXpress Holdings (Nasdaq: OXPS  ) and TradeStation (Nasdaq: TRAD  ) , last month.

Would E*TRADE buckle under pressure, too?

Well, it wasn't a great report, but E*TRADE managed to at least match Wall Street's bottom-line expectations, posting a substantially smaller deficit than it did a year ago. The discounter's $0.04-per-share quarterly loss is a sliver of the $0.50 a share it surrendered a year earlier. Even if cynics point out that E*TRADE's fully diluted share count has more than tripled over the past year as the broker beefs up its balance sheet, it still posted a marked improvement on the bottom line.

There were also setbacks. Daily average revenue trades fell by 20%, but that's off the frenetic trading pace set during the final quarter of 2008, when everyone was dumping their shares in frenzied capitulation. After drawing net new brokerage accounts through the first three quarters of the year, E*TRADE finally closed out more accounts than it opened during the fourth quarter.

These two negative developments will be something to watch for in the near term, but that won't make E*TRADE any less attractive a buyout candidate for TD*AMERITRADE, Schwab, or any other potential suitor looking for some skin in the discount brokerage game. Yes, E*TRADE could be doing better, but its larger rivals could also use a little non-organic boost to grow during the market lull.

It has been argued that buyers may wait until E*TRADE has completely exorcised its bad-loan demons, but that could be a costly mistake. The broker has made serious headway in cleaning up its subprime exposure, and some analysts see a return to profitability this year. These events would naturally drive E*TRADE's asking price higher.

Can an industry hungry for good news wait much longer before the final act of consolidation is complete? I don't think so.

What's that? You're still unsure about whether you should get a new broker? Get thee to our Discount Broker Center to learn more and compare some sponsored commission schedules.

Charles Schwab and optionsXpress are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been trading exclusively through discount brokers since 1990, but he owns no shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Foolhas a disclosure policy.


Read/Post Comments (4) | Recommend This Article (10)

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  • Report this Comment On February 01, 2010, at 11:33 AM, foolishbroker68 wrote:

    I wouldn't count on a buy out as reason to purchase this stock. They have an accumulated loss of almost $800 that would become realized in a buyout transaction and require additional capital above the equity purchase. They would also have to mark the loan portfolio to market requiring several billion more in capital. It is quite unlikely that this company gets purchased in the near term. I think the overall market must first recover and at minimum negate the mark to market issues before an acquisition is viable.

  • Report this Comment On February 02, 2010, at 2:31 PM, ikkyu2 wrote:

    Agree, reorg-in-BK is far more likely.

  • Report this Comment On February 02, 2010, at 4:12 PM, srun wrote:

    The buyout rumors have roller-coastered the stock lately, but I don't think any of it can be substantiated yet. However, buyout or not, E*Trade is most certainly a brand name, and as the Superbowl approaches, so do those damn babies... Love em or not, we all know them... I just purchased more ETFC today and plan to do so anywhere under the $2.00 mark.

    There's as much good as there is bad regarding E*Trade, but since I'm forward looking, I'm betting on ETFC.

    In six months, let's see who benefited the most, those who were eager to point out it's flaws, or those who trusted in a brand name.

  • Report this Comment On February 02, 2010, at 8:12 PM, jesterboomer wrote:

    I am interested in Etrade but cautious because of the high short term debt. Short term debt and A/P are considerably higher than cash and how does one assess the liquidity of Etrades long term investments?

    Once bitten twice shy. Previously caught by debtholders bankrupting a viable company in a short term liquidity squeeze and walking off with the assets at a discount price.

    So who is holding ETrades short term debt?

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