Market Overview

Analyst: $0 Commissions Makes E*TRADE A Buyout Target

Analyst: $0 Commissions Makes E*TRADE A Buyout Target

The discount broker pricing war that has pushed trading commission fees down to $0 virtually across the board has been bad news for broker stocks and fee revenues. However, one analyst said Monday that E*TRADE Financial Corp (NASDAQ: ETFC) is now an attractive buyout target in the post-commission world.

The Analyst

Bank of America analyst Michael Carrier reiterated his Buy rating and $45 price target for E*TRADE.

The Thesis

Carrier said discount brokers are in a tough spot due to disappearing commission revenue, falling interest rates and peaking retail market engagement for the current cycle. One way for discount brokers to counter the headwinds of losing commission revenue us to scale their businesses via mergers and acquisitions.

Carrier said E*TRADE is an attractive potential target for both Charles Schwab Corporation (NYSE: SCHW) and TD Ameritrade Holding Corp. (NASDAQ: AMTD). Bank of America estimates the potential takeout premium for E*TRADE would be about 25% above market price regardless of the buyer.

“Given its valuation, decent core trends, active expense/capital management, and M&A optionality, ETFC remains our top pick among the online brokers,” Carrier wrote in a note.

M&A could also be good news for the buyers. Carrier said TD Ameritrade could generate 70% cost synergies in a hypothetical takeover of E*TRADE, which would produce between 25% and 30% EPS accretion. Schwab would also enjoy 70% cost synergies while producing between 15% and 20% EPS accretion if it makes a play for E*TRADE.

Benzinga’s Take

Look for discount brokers to be aggressive in making adjustments given their relatively strong cash flows and limited near-term organic growth opportunities. Don’t underestimate how much fear could drive the bidding for E*TRADE as well, as neither Schwab nor TD Ameritrade wants to watch E*TRADE go to its competitor.

Do you agree with this take? Email with your thoughts.

Latest Ratings for ETFC

Dec 2019MaintainsOutperform
Nov 2019MaintainsUnderweight
Nov 2019MaintainsOverweight

View More Analyst Ratings for ETFC
View the Latest Analyst Ratings

Posted-In: Bank of America Michael CarrierAnalyst Color M&A Price Target Analyst Ratings Best of Benzinga


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