You'll have to forgive me for having a soft spot for E*Trade Financial
But I digress. Judging by E*Trade's 2007 earnings guidance call last week, the company has come a long, long way from its ill-advised Superbowl commercials and the uproar over ex-CEO Christos Cotsakos' $88 million payday in 2001. In fact, the company offered upbeat guidance for 2007 in that call, and is going into the new year with some momentum.
The great thing about E*Trade and archrival TD Ameritrade
This is great news, because online brokerage is a game of scale, with fixed costs for trading infrastructure providing tremendous operating leverage as volume increases. In the call, E*Trade noted that its incremental operating margin was a whopping 75%, which has led it to target a mouthwatering 50% operating margin by the end of next year. The company plans to spend $85 million next year on marketing, which is $45 million above the normal rate. E*Trade also announced its decision to switch to the Nasdaq from the NYSE, given that 99% of its trades are executed on the Nasdaq and other electronic exchanges, which would also allow it to partner with Nasdaq to offer stock plan administration services to fellow Nasdaq companies.
E*Trade outlined a number of market opportunities. It believes that the mass affluent households with $50,000 to $500,000 in investable assets are underserved and ripe for the picking, given that there are 80 million mass affluent households worldwide with $12 trillion in investable assets and twice the growth rate of the overall population. Furthermore, these customers have four times the average account size, trade five times as much, and have three times the cash balance. E*Trade believes that every additional 1% market share it acquires will lead to $450 million in sales, in contrast to E*Trade's current $2 billion in sales.
E*Trade also hopes to grow international operations from under 10% of sales currently to over 30% by 2010. The company has something of a free call option on this because it can use its using existing infrastructure to provide services overseas, meaning minimal expenditures and financial risk. Another positive note was that E*Trade, as well as competitors Fidelity, Schwab
Lastly, the company plans on hiring more relationship managers to give more customers personal service, and to offer futures trading and direct access to six foreign markets. All of these should help the company meet its ambitious goals of $2.75 billion-$3 billion in sales, and $730 million to $800 million in net income, which would give E*Trade a forward 13-14 P/E ratio. Although the company is always vulnerable to bear market-induced trading droughts and pricing wars, those risks seem to be mitigating as the company diversifies its trading offerings and markets and as the industry consolidates.
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates comments, concerns, and complaints. The Motley Fool has a disclosure policy.