Time to Adopt the E*TRADE Baby?

Shares of E*TRADE (Nasdaq: ETFC  ) soared 14% yesterday, after its largest investor publicly suggested that the company should put itself up for sale.

After the market close, the discount broker released second-quarter results that would justify a sale -- yet give a potential suitor a good reason to pay top dollar for E*TRADE.

Revenue fell slightly to $517.6 million, as trading activity slowed during the period. E*TRADE's daily average revenue trades clocked in at 148,000. That's down 17% sequentially, and off by 13% compared to last year's second quarter.

We already knew that trading activity had cooled off in recent months. Charles Schwab (NYSE: SCHW  ) and TD AMERITRADE (Nasdaq: AMTD  ) checked in with similar slowdowns earlier this week. During the same three months, daily average revenue trades fell 11% year over year at TD AMERITRADE, and 13% at Schwab.

This temporary sluggishness nonetheless provides brokers a great reason to consolidate. By joining forces with one of its larger rivals, E*TRADE could enjoy greater economies of scale. The market can only bear so many commission schedule cuts and commission-free ETFs, after all.

Wall Street seems to think that the time is right for these discounters to team up. After Citadel -- with a nearly 10% stake in E*TRADE -- suggested a sale yesterday, shares of TD AMERITRADE closed 6% higher.

That capital-letter-intensive pairing has always made sense. Schwab was a distant contender, and right now it's still waiting to close on its acquisition of optionsXpress (Nasdaq: OXPS  ) .

Why should E*TRADE be able to command attractive terms in a potential deal? Let's work our way down to its bottom line, where earnings rose from $0.12 to $0.16 a share year over year. The discounter hasn't necessarily mastered its cost structure well enough to miraculously widen its margins, but its loan loss provisions did fall sharply during the period.

In other words, E*TRADE can still benefit from a corporate combination that would eliminate redundancies. But improvements in its once-problematic loan portfolio nonetheless make it an attractive catch for any would-be buyer.

What's that? You're still unsure about whether or not you should get a new broker? Get thee to our Discount Broker Center to learn more and compare some sponsored commission schedules.

Motley Fool newsletter services have recommended buying shares of Charles Schwab and optionsXpress Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.  

Longtime Fool contributor Rick Munarriz has been trading exclusively through discount brokers since 1990 but he does not own 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 Fool has a disclosure policy.


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  • Report this Comment On July 21, 2011, at 6:49 PM, cwalthers wrote:

    I hope they'll get their act together and not have to be sold. They have been great insofar as not being in your face (inundating one with emails you don't want), but you know they're there if you need to use them. They're uncomplicated, when it comes to my needs anyway. They are great at transferring money from your bank to their's and on to another, quickly and without fuss. I would miss them.

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