Jefferies Upgrades E-Trade Financial, 'A Unique And Scarce Asset'

With a potential sale looming, shares of E-Trade Financial Corp. (NASDAQ: ETFC) are attractive, according to Jefferies. 

The Analyst

Jefferies analyst Daniel Fannon upgraded E-Trade Financial from Hold to Buy and maintained a $65 price target.

The Thesis

The upgrade demonstrates the valuation of the stock itself and upside potential from the proposed takeout, Fannon said in the Wednesday upgrade note. (See his track record here.)

“ETFC represents a unique and scarce asset within a consolidating industry. In a takeout scenario, we believe ETFC could be worth as much as the low $70/s, or 18-19x 2019 EPS," the analyst said. 

Commission pricing remains pressured, as low-cost investment trends lead to ongoing industry consolidation, Fannon said. “Whether to add strategic capabilities or simply to add scale and slow the inevitable bleed (e.g. commissions), the notion of standing still will be hard to justify." 

“ETFC represents the last platform of meaningful size and brand that would add value both financially and strategically to other industry participants. TD Ameritrade Holding Corp. (NASDAQ: AMTD) and Charles Schwab Corporation (NYSE: SCHW) we view as the most likely buyers given the expense overlaps, with AMTD having the ability to pay the most," Fannon said. 

According to business updates, August activity levels represented strong investor engagement and positivity, the analyst said.

Equity markets and interest rates remain a positive tailwind, while deposit betas are forecast to increase roughly 20 percent on average for future rate hikes, he said. 

Price Action

E-Trade Financial shares were up 3.13 percent at $55.44 at the time of publication Wednesday. 

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Photo by Thomas Hundt/Wikimedia.