Stock markets have taken wild rides in 2011, thanks to a string of unprecedented events, including the European debt struggles, a Japanese earthquake, and the U.S. debt-ceiling impasse and ensuing downgrade of its sovereign rating.
Fear has investors jumping to the sidelines, yet for discount brokerage and financial institution E-Trade Financial (ETFC) business is going well despite uncertain times. Revenue during the second quarter ending June 30 came to $518 million, down 3 percent from the same quarter in 2010 on decreased commissions and trading activity.
Net income rose 34 percent to $47.1 million thanks to efforts to clean up its loan portfolios. Executives say such moves will make the brokerage a valuable investment down the road.
"Within the loan portfolio, we experienced a continuation of improving delinquency trends, and continue to focus on risk mitigation activities to stem future losses. Collectively, our successes this quarter allow us to maintain focus on initiatives that we believe will further enhance the customer experience and create value for shareholders," says E-Trade CEO Steven Freiberg in an earnings statement.
While trading volume may have fallen, customers are opening new accounts, especially corporate clients. "While our brokerage results were affected by an industry-wide decline in trading activity, we have continued to experience positive momentum in a number of metrics, including the generation of new accounts and assets, the growth of margin receivables, and improvements in customer retention," Freiberg says.
Whether investors should buy E-Trade stock these days might depend on who is running it. The broker has been the subject of takeover talk in wake of calls made by key investor Citadel, a hedge fund, to bring in new ownership.
E-Trade has retained the services of JP Morgan Securities to advise on such a possibility. Takeover talk can send stocks up and down, but ratings agencies are keeping an eye on company financials.
Moody's Investors Service upgraded the company to B2 from B3 due to decisions to improve financial health, in part by refinancing debts. In Moody's view, competition is the biggest risk.
"If it fails to adequately invest in its core brokerage franchise, its organic growth may not be sufficient to keep up with larger scale competitors, such as Charles Schwab, TD Ameritrade, and Fidelity," Moody's says in a statement on the company.
"Any resulting competitive disadvantage in product offerings and costs could negatively impact E-Trade’s core brokerage market share and earnings." The company will release third-quarter results around Oct. 20.
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