Amid Broker Pricing Wars, E*Trade's Stock Initiated With A Buy

Brennan Hawken of UBS initiated coverage of E*TRADE Financial Corp ETFC on Monday with a Buy rating and $43 price target as the company has various paths towards value creation.

E*Trade's acquisition of OptionsHouse should be viewed as "key" to the company's turnaround story. Specifically, OptionsHouse was considered to be a leading trading platform among active derivative traders which provides E*Trade with a new avenue of growth.

E*Trade's new pricing tier, which gives a discounted rate for customers who place more than 30 orders per quarter, could provide the necessary incentive to pick up activity levels. Granted, the broker's recent price reduction in its rates will impact revenue, the firm's rates for higher activity customers will generate incremental volume and could prove to be less dilutive than expected.

Hawken also suggested the ability to consolidate OptionsHouse's accounts with existing E*Trade accounts is a major positive. In fact, in the heightened competitive landscape among brokers, the ability to offer a superior trading platform provides a good, non-economic differentiation.

Acquisition Target

Hawken noted that E*Trade's board of directors stated last year it would explore strategic options if internet targets are not achieved. As such, the analyst suggested investors should take the comments at face value and view a potential day as being a key part of the investment thesis.

The analyst pointed out that prior deals in the brokerage space have been finalized as high as 35x LTM and as low as 17x with a median of 20x. Based on Hawken's estimates, the company could be acquired for $37 to $75 per share based on his 2018 estimates.

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