Tuesday, March 07, 2006

Is E-Trade A $30 Stock?

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

We're re-iterating our bullish sentiment on the online broker and upping our price target from $25 to $28.

You'll remember that on January 23rd, with the stock in the low 20's, we wrote:

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.

E-trade is not without its risks. They include deteriorating pricing power, the flatenning yield curve (most of which we think is already baked into the price of the stock), and integration risks connected with any future acquisitions.

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