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E*TRADE (ETFC) to Report Q1 Earnings: Surprise in Store?

E*TRADE Financial Corporation ETFC is scheduled to report first-quarter 2016 results on Apr 21, after market close.

Last quarter, E*TRADE recorded a positive earnings surprise of 3.4% and a 15.4% year-over-year increase in earnings. Results reflected increased net operating interest income and a benefit to provision for loan losses. However, higher operating expenses and a decline in daily average revenue trades (DARTs) were the dampeners in the quarter.

Will E*TRADE be able to beat estimates this time around or will it disappoint? Let us see how things have shaped up for this announcement.

Factors to Consider

With operations spread worldwide, primarily in the U.S., Europe and Asia, E*TRADE is poised to benefit from the volatility in the global equity markets. This was reflected in the increased daily trading volumes recorded by the company during the first quarter.

Based on the monthly reports released by the company, DARTs escalated over 11.6% to 164,077 at the end of Feb 2016, from 147,000 recorded in Dec 2015. Further, the company opened 4,815 and 17,875 new brokerage accounts in January and February, respectively, which indicates investors’ interest in entering the market. As such, trading revenues, including commissions and fees, are likely to trend upward in the to-be-reported quarter.

However, E*TRADE's pressurized net interest spread, restrictions owing to the use of credit facility and increased regulatory issues are expected to act as headwinds in the quarter.

What Management Expects

For first-quarter 2016, management expects operating expenses to be about $310 million, including the sequential increase in marketing expenses.

For 2016, with the assumption of the Fed funds rate to be constant along with margin, stock lending and prepayment speeds, management expects spread to be in the 270 basis point to 275 basis point range with high 270s in first-quarter 2016.

Full-year 2016 provision expenses are likely to be near zero, though charge-offs are expected to increase in 2016. In 2016, management plans to hire people for business growth for which consultant headcount would decline in professional services. Moreover, marketing expenses are expected to increase in the high single-digit percentage range. Further, due to reduced FDIC insurance premiums, there was a decrease in assessment rate in mid-2015, the full benefit of which is expected in 2016. Moreover, this expense is anticipated to be about $6 million per quarter.

For 2016, management anticipated securities gains to be in the $30–$40 million range, with quarterly variability.

Nevertheless, the company’s activities during the quarter failed to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained unchanged at 33 cents per share over the past 7 days.

Earnings Whispers

E*TRADE posted positive surprise in three of the prior four quarters and a negative surprise in one quarter. Overall, the company has delivered an average positive earnings surprise of 11.98% in the trailing four quarters.

However, our proven model does not conclusively show that E*TRADE is likely to beat the Zacks Consensus Estimate in the first quarter. This is because a stock needs to have both a positive">Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP:  The Earnings ESP for E*TRADE is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 33 cents.

Zacks Rank: Though E*TRADE’s Zacks Rank #3 increases the predictive power of ESP, we also need to have a positive ESP to be confident of an earnings beat.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Banc of California, Inc. BANC has an earnings ESP of +9.09% and a Zacks Rank #1.

The earnings ESP for PrivateBancorp, Inc. PVTB is +1.75% and it carries a Zacks Rank #3.

Simmons First National Corporation SFNC has an earnings ESP of +1.30% and carries a Zacks Rank #3.

Notably, all the three companies are scheduled to report their first-quarter results on Apr 21.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
PRIVATEBANCORP (PVTB): Free Stock Analysis Report
SIMMONS FIRST A (SFNC): Free Stock Analysis Report
E TRADE FINL CP (ETFC): Free Stock Analysis Report
BANC OF CA INC (BANC): Free Stock Analysis Report
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