The E*TRADE baby will remain a solo act.
Shares of the discount broker tumbled 4% on Friday, after the company revealed that it will not be seeking a sale after all.
E*TRADE (Nasdaq: ETFC) is probably doing the right thing here. The Web-savvy discounter has the potential to trade substantially higher in the long run, especially if it continues to profitably grow its brokerage business as it trims its exposure to its problematic loans.
When Goldman Sachs (NYSE: GS) -- an investment banker that stands to gain more financially by playing matchmaker than cheerleader here -- advises E*TRADE that its best strategic alternative is to remain independent, that's "man bites dog" advice worth heeding.
E*TRADE would have certainly looked good on TD AMERITRADE's (Nasdaq: AMTD) arm, especially at a time when falling commission rates and the need to offer up transaction-free exchange-traded funds make this a niche where scale matters.
Unfortunately, TD AMERITRADE was probably the only suitor that really made sense. Discounting pioneer Charles Schwab (NYSE: SCHW) had just closed on its acquisition of optionsXpress back in September, so the options broker is still moving through Chuckie's digestive tract.
Big-name banks seemed like no-brainer candidates. Why wouldn't they want to reach out to individual investors through one of the industry's most recognizable brands? Unfortunately for Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), and Citigroup (NYSE: C), they have a PR nightmare on their hands, even after largely abandoning the recent wave of unpopular account fees. The "too big to fail" banks seem greedy to consumers, who are voting with their feet. Snapping up E*TRADE would just seem greedy, probably resulting in more than a few resentful account closures.
The state of the deal
E*TRADE executed a 1-for-10 reverse split last year, catapulting its stock into the double digits. Well, it's back in the single digits again.
The good news here is that E*TRADE is profitable and growing. Analysts see the discounter earning $0.66 a share this year and $0.75 a share next year. The bad news is that Wall Street's profit target for 2012 was as high as $0.97 a share just three months ago. Estimates have also come down sharply for larger rivals TD AMERITRADE and Schwab, so this isn't an E*TRADE-centric downward revision.
The hosed-down outlooks aren't fatal, and this is an industry that can turn on a dime at the first whiff of a sustainable spike in trading activity and improving margins. When it happens, E*TRADE will be there to profit from the move all on its own.
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