Shares of discount broker E-Trade (NASDAQ: ETFC) opened sharply higher on Thursday after reporting its financial results for the 1st quarter. The company’s revenues for the quarter were $755 million, a new record, while net income was $290 million.

Diluted EPS of $1.09 were well ahead of consensus and up 23% over the previous year. This allowed E-Trade to declare a quarterly dividend of $0.14 for its common shares. Lower expenses and rising rates also allowed the company to earn a record adjusted operating margin of 50%.


Falling Commissions Despite Strong New Client Growth

The company added 135,000 net new accounts during the quarter and grew retail and advisor assets by $4.7 billion, bringing interest-earning assets to $61 billion.

However, like most brokers, E-Trade continues to see its commissions and Daily Average Revenue Trades (DARTS) decline. This is a result of increased competition, industry disruption by new platforms, and changes to the business models of advisors.

While commissions fell 10.9%, all other categories rose between 9 and 12.4%. Net interest income accounted for 65% of revenue, while commissions and fees each accounted for around 16% of revenue.


New Growth Catalyst Needed

Longer-term investors may want to wait for evidence of a pick up in fee revenue or commissions.

Despite the positives, E-trade’s stock price is still down 13% over 12 months and some 23% from last June’s all-time high. The stock is probably fairly priced given where analysts see earnings a year out. E-trade has healthy margins and a decent return on equity – so if there was any sign of growth accelerating, the share would be very attractive.

However, in the face of stiff competition from commission-free platforms like Robinhood and JP Morgan’s You Invest, E-Trade will need a bold strategy to return to higher growth rates. For now, there doesn’t appear to be a compelling argument for accelerating growth – so longer-term investors may want to wait for evidence of a pick up in fee revenue or commissions.


The Market Leader?

There may, however, be an opportunity for more active traders over the next few months. Two of E-Trade’s rivals, Charles Schwab and Interactive Brokers also reported this week. While both beat earnings estimates, all three companies are facing challenges in parts of their business. Nevertheless, judging by the market’s reaction, E-Trade seems to be the preferred stock in the industry.

All three companies also have stock charts that would look very bullish if the resistance that has developed over the last 10 months is convincingly broken. E-Trade broke that resistance level on Thursday, but Charles Schwab and Interactive Brokers are still battling resistance.

It’s unlikely that E-Trade will rally on its own, but if all three can hold above resistance, E-Trade may offer momentum traders a rally back toward the previous highs. A move like that would in all likelihood accompany a broad market rally, and would be driven by sentiment rather than long-term fundamentals.

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