A couple of weeks ago, we initiated a Sell trade rating on E-Trade saying that the competitive environment was only going to get worse following the closure of the Ameritrade/Schwab deal and that we struggled to see a buyer for the company.
That was the wrong call as Morgan Stanley announced this morning that it would acquire E-Trade in a stock deal worth $58.74/share.
We continue to believe that the fundamentals would have gotten worse, which is why we think E-Trade chose to sell. However, we underestimated its attractiveness to a traditional Wall Street investment bank that was looking to move downstream into the more stable consumer market. In retrospect, when Goldman Sachs focused on its recent analyst day on the consumer markets, we should have realized that E-Trade would be in play.
The deal will help MS build out its brokerage as well as its stock administration business. MS acquired Solium, a competitor to E-Trade's stock administration business last year for what looks to be 9x sales. E-Trade will complement Solium nicely as E-Trade has the leading position in this business.
In addition to the strategic benefits, there are also significant financial benefits. MS sees $400mm ($1.21 per share based on 28% tax rate and 236mm shares outstanding) in cost synergies and $150mm from using E-Trade's low cost deposit base to replace higher costs of funding. ($0.46 per share).
Despite the premium, Morgan Stanley looks to have picked up E-Trade at an attractive valuation. This $1.67 in EPS added to the $3.66 2020 consensus EPS estimate implies pro forma EPS of $5.33 or an 11x multiple. The stock traded at 11.5x over the past twelve months and at 17x over the past five years.
As a result of the deal, we're closing out our trade recommendation at $57.13. We initiated the trade at $43.63 for a 24% loss.
That was the wrong call as Morgan Stanley announced this morning that it would acquire E-Trade in a stock deal worth $58.74/share.
We continue to believe that the fundamentals would have gotten worse, which is why we think E-Trade chose to sell. However, we underestimated its attractiveness to a traditional Wall Street investment bank that was looking to move downstream into the more stable consumer market. In retrospect, when Goldman Sachs focused on its recent analyst day on the consumer markets, we should have realized that E-Trade would be in play.
The deal will help MS build out its brokerage as well as its stock administration business. MS acquired Solium, a competitor to E-Trade's stock administration business last year for what looks to be 9x sales. E-Trade will complement Solium nicely as E-Trade has the leading position in this business.
In addition to the strategic benefits, there are also significant financial benefits. MS sees $400mm ($1.21 per share based on 28% tax rate and 236mm shares outstanding) in cost synergies and $150mm from using E-Trade's low cost deposit base to replace higher costs of funding. ($0.46 per share).
Despite the premium, Morgan Stanley looks to have picked up E-Trade at an attractive valuation. This $1.67 in EPS added to the $3.66 2020 consensus EPS estimate implies pro forma EPS of $5.33 or an 11x multiple. The stock traded at 11.5x over the past twelve months and at 17x over the past five years.
As a result of the deal, we're closing out our trade recommendation at $57.13. We initiated the trade at $43.63 for a 24% loss.
Originally published on 02/20/20.
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