E*Trade (NASDAQ: ETC) has been the most battered and brutalized of the large discount brokers and online brokers out there.  It quite frankly deserved it after the company publicly understated its gross mortgage exposure by a massive amount late last summer.  When the truth came out, this one looked like it might actually be an at-risk business.  That possibility wasn’t even 100% eliminated after Citadel came to its rescue.

But tonight the company posted earnings.  The company lost roughly $1.7 Billion in the Q4-2007 period, which came to a loss after charges of -$3.98 EPS.  It was already a given that last quarter was going to be a disaster. 

The company is finally coming out with its 2008 turnaround plan.

• E*Trade is targeting a $360 million reduction in expenses for 2008, and it will re-invest $85 million into its retail business growth.  E*trade also says it expects to exit 2008 with excess bank capital of close to $1 Billion.  And get this.. it expects "a return to profitability in 2008."  It also plans "to remove undue risk" from its balance sheet.

If you look at what the company is saying, it really doesn’t look like the online brokerage account defections really came in a flurry that Wall Street might have guessed:

• The Company said its total retail account base grew by 290,000 or 7%, with target segment account growth up 14%. For the quarter, DARTs rose 38% over the year-ago period. Total customer cash and deposits ended the year flat at $33.6 billion, with total client assets declining 3 percent year-over-year to $190.0 Billion.

If the situation isn’t as bad as many worried it might be, then youhave to wonder if Mr. Moglia from TD Ameritrade (NASDAQ: AMTD) or ifMr. Schwab from Charles Schwab Corp. (NASDAQ: SCHW) will be stopping byE*Trade’s offices for a visit.  This has been review in our "10 StocksUnder $10" several times, and you can bet that it will be back underreview.

We still expect class action lawsuits to be an issue going forward because the insiders understated the true financial exposure so bad.  But if the company can actually maintain its stance of today for the future then it’s going to be quite hard to predict any outright implosion here.  This stock rose 0.5% today in normal trading to $3.48, and shares are up some 12% to $3.91 in after-hours trading.  The 52-week low is $2.08… and the high is $25.79.

Jon C. Ogg
January 24, 2008

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