Rethinking of E*TRADE as Buyout Bait (ETFC, SCHW, AMTD, GS, MS)

E*TRADE Financial Corporation (NASDAQ: ETFC) has been discussed by many market pundits as a takeover target since the recovery out of the recession.  The online brokerage giant has been doing almost everything that it can to improve its problem loans and credit areas of the business.  It is still hindered by a total lack of ability to make any money on customer cash balances due to the FOMC’s low (or no) short-term interest rates. Shares are back in interest after Doug Kass called this one as likely succumbing to pressure from Citadel’s Ken Griffin to sell itself. 

Kass noted on Thursday evening on CNBC that it is his largest position because he thought that Charles Schwab Corp. (NYSE: SCHW) or TD AMERITRADE Holding Corporation (NASDAQ: AMTD) would be an acquirer of the company.

To highlight just how long E*TRADE has been in the buyout camp, we have noted back as far as the days of the crash in 2008 and 2009 that Goldman Sachs Group Inc. (NYSE: GS) or even Morgan Stanley (NYSE: MS), more likely the former rather than the latter, could step in to buy E*TRADE to take care of their “bank holding company status” when you consider that they have no real banking operations to speak of.  We have also noted that this could be bait when shares were far lower and even higher now that the last two months have proved to be so brutal.

This summer Goldman Sachs, in an analyst call (not an investment banker call), noted a higher target due to what it felt was a 30% chance of M&A heading its way.  It was also this summer that we put a maximum value at $20.00 per share in a buyout at the time and Thomson Reuters had a consensus price target objective at the time of roughly $16.50 at the time.  The problem with an E*TRADE buyout today is that its shares have pulled back incredibly hard in recent months losing half of its value since mid-July.

Even after a 2% gain to $9.05 today, the 52-week range is $7.74 to $18.13.  Now analysts have a consensus price target down closer to $14.00.  That old $20.00 max buyout price would have to be lowered.  It might have to be lowered considerably.  Investors just are not willing to value stocks at the same multiples today and a would-be acquirer would be expected to be in the same boat.

E*TRADE is now doubling its sales force to go after more and more of its trading clients for a larger piece of their business.  Retirement plans and other services seem to be the push.  Now that the stock has fallen precipitously, the Thomson Reuters consensus estimates are $0.67 EPS for 2011 and $0.89 EPS for 2012.  This represents a far more fair valuation where a buyer would not have to pay a ridiculous premium nor would a buyer have to pay a ridiculously excessive earnings multiple to acquire E*TRADE.  Still, anything closer to the summer levels might not make that “affordability” grade make the cut.

JON C. OGG