E*Trade Rumblings

There has been much commentary recently regarding the takeover potential of E*Trade (ETFC).  Analysts are largely bullish on the stock citing the bottoming of the housing market and resulting stabilization of ETFC's outsize mortgage portfolio, as well as the strength of ETFC's core brokerage business.  Recently selling pressure has been attributed to portfolio rebalancing by institutions with greater than 9.9% exposure.

Likely suitors include Schwab (SCHW) and TD Ameritrade (AMTD), both of whom have expressed interest in E*Trade's 2.7 million retail accounts.  However, we disagree with the contention that larger institutions such as Wells Fargo (WFC) or Goldman Sachs (GS) could also make a play.  While yes, these companies would be better positioned from a balance sheet standpoint to absorb E*Trade's mortgage portfolio, the synergy is simply not there, particularly in the case of GS.  The bigger question still is whether ETFC would even want to sell.  With the economy improving, and with the company still maintaining a highly competitive position, any offer would have to be at a considerable premium to the current price of $1.70.

Stripping away its balance sheet woes, ETFC is fundamentally strong.  The company is successfully growing its account base, as well as its brokerage-related cash while keeping operating expenses low.  In addition, ETFC continues to deploy cutting-edge desktop and mobile trading technologies, and remains one of the most recognized brands in online trading. 

Apart from its takeover potential, we believe ETFC is a strong buy at current levels with a one year price target of $5.00.