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In what's become a theme this earnings season for financial stocks, E*TRADE (Nasdaq: ETFC ) posted estimates-trouncing first-quarter results that were distorted by a special one-off charge. Nonetheless, the discount brokerage still managed to improve notably over its previous quarter. More critically, the company turned a healthy profit, something it hasn't done too often in the course of its rocky history. E*TRADE competes in a tough business, so it has some distance to go before it really takes off.
Thank you, Mr. Tax Man
Analysts were expecting around $0.09 per share in profit for E*TRADE; imagine their surprise when the company posted $0.22 instead. That looks amazing, but $0.09 of that $0.22 was due to a tax benefit thanks to IRS deductions that weren't previously in force.
Such single-item distortions have been prevalent this earnings season for financials, what with Bank of America's (NYSE: BAC ) earnings getting sapped by $4.5 billion on what was essentially an improvement in its own debt. Closer to E*TRADE's investment-banking home, Morgan Stanley (NYSE: MS ) got hit with a similar markdown, to the tune of $2 billion. Without that punch to the gut, the bank would have been profitable to the tune of $1.4 billion.
Getting on its feet
Regardless of the nice break it received, E*TRADE's results were encouraging. Stripping out the tax benefit puts EPS at $0.13 per share, or 30% above what analysts had expected. That totals out to net profit of $62.6 million for Q1, a nice about-face from the $6 million loss of the previous quarter and a nearly 40% rise from Q4 2011's bottom line.
Other metrics provide more fuel for optimism. With America's housing and debt crises subsiding, the company relaxed its provisions for loan losses; the amount dropped 41% quarter on quarter and at nearly the same level on an annual basis. This is particularly encouraging, as a bad loan book can easily whack profitability for even the mightiest banks. Maybe this is a start for E*TRADE, an encouraging sign that it intends to move away from lending.
A tough crowd
E*TRADE's starting to do quite well, but since discount broking is a sector crowded with strong competitors, it'll have to do better. Even with that happy tax gain included, its net margin was only around 13% -- several percentage points shy of Charles Schwab's (NYSE: SCHW ) most recent showing. It is also well below of the 20%-plus margins routinely delivered by TD AMERITRADE (Nasdaq: AMTD ) , a track record that even includes the relatively weak results that company posted in its latest quarter.
It's good that E*TRADE seems to be fixing its loan portfolio and getting back to brokerage basics. If it continues to improve, maybe in the future it won't need a big tax break to post impressive net profit numbers.
Meanwhile, we've identified a few promising financial stocks. Want to learn more? You can download our free report.