UBS recommends ETrade shares on possible takeover, expansion into options market

Published Mon, Mar 13 20171:25 PM EDT

Investors should buy ETrade on the brokerage firm's expansion into the options market and a potential takeover, said UBS, which initiated the stock at a buy. "ETFC's new management team has implemented a plan to improve operating metrics or seek a buyer for the franchise, which should help to limit downside in ETFC shares, in our view," said UBS analyst Brennan Hawken in a note on Monday. CNBC reached out to ETrade for comment but did not receive an immediate reply. The broker acquired Aperture New Holdings, the parent company of OptionsHouse, for $725 million in July 2016 . OptionsHouse, which merged with tradeMonster in 2014, had more than 150,000 accounts. ETrade shares are up around 2 percent this year, trailing the overall market, as investors grow worried about increasing price competition in the online brokerage business. ETrade shares year-to-date performance Brokerage firms continue to struggle with a price war , marked by multiple cuts to commission rates by firms like Charles Schwab and Fidelity. "In an environment marked by price competition, superior trading capabilities provide a good, non-economic differentiator, which OH provides… OH was regularly rated as a top trading platform, particularly for active derivatives traders, which should allow ETFC's growth to accelerate," Hawken noted. Hawken initiated ETrade with a price target of $43, assuming a price-earnings ratio of 20 based on his estimate of $2.15 per share for 2018. The analyst's price target represents 22 percent upside from Friday's close of $35.15. However, the analyst sees an even greater upside in light of a potential deal. "Given the chairman of ETFC's board publicly indicated (9/2016) that they would explore strategic options if the company does not hit its targets, we see a potential deal as a key part of the ETFC thesis. Looking at recent earnings multiples in deals in the discount broker space suggests a range of 17x to 35x LTM (median is 20x, which is in line with our target multiple). That would suggest a very wide range of $37 to $75 per share, based on our 2018 estimates," Hakwen said.

Pedestrians walk outside an E*Trade Financial office in New York.

Daniel Acker | Bloomberg | Getty Images

Investors should buy ETrade on the brokerage firm's expansion into the options market and a potential takeover, said UBS, which initiated the stock at a buy.

"ETFC's new management team has implemented a plan to improve operating metrics or seek a buyer for the franchise, which should help to limit downside in ETFC shares, in our view," said UBS analyst Brennan Hawken in a note on Monday.

CNBC reached out to ETrade for comment but did not receive an immediate reply.

The broker acquired Aperture New Holdings, the parent company of OptionsHouse, for $725 million in July 2016. OptionsHouse, which merged with tradeMonster in 2014, had more than 150,000 accounts.

ETrade shares are up around 2 percent this year, trailing the overall market, as investors grow worried about increasing price competition in the online brokerage business.

ETrade shares year-to-date performance