Monday, January 23, 2006

After the Close: E-Trade

E*Trade (ET) has been kicking some serious butt as of late.

We're initiating coverage on the online brokerage, which reports earnings later today, with a strong buy rating.

Our investment thesis is based on three upside drivers.

One, E*Trade is rapidly gaining market share.

We believe that this is resulting from a confluence of sound acquisition initiatives and increased advertising for its rapid execution trades.

Two, given its operating synergies, we believe that E*Trade is itself a viable acquisition target.

The overriding trend in online brokerage points to consolidation, and E*Trade's competitive position is certainly strong, arguably second to that of Ameritrade (AMTD).

Lastly, on a valuation basis, E*Trade is not expensive.

It is not unreasonable to think that the company could fetch 22 - 25 X forward results given its earnings growth, expanding market influence, and diversified business model (brokerage, lending, and banking).

In short, a valuable franchise like E*Trade could see $25 before it sees $20.

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