Attractive Entry Point, Tax Cuts Drive Morgan Stanley's E*Trade Upgrade

After gaining more than 40 percent in 2017, E*TRADE Financial Corp (NASDAQ: ETFC) has further upside ahead in 2018, according to Morgan Stanley.

The Analyst

Morgan Stanley's Michael Cyprys upgraded E*Trade from Equal-weight to Overweight with a price target boosted from $44 to $63.

The Thesis

E*Trade's stock return throughout 2017 left many investors happy, but shares are surprisingly trading at a greater discount to its peers, which is "unwarranted," Cyprys said in the upgrade note. (See the analyst's track record here.) 

E*Trade's stock is trading at a 13.5 times multiple on the analyst's 2019 earnings per share estimate, which is a 22 percent discount to its biggest peers versus a historical average of 12 percent. 

Cyprys named four reasons to justify owning the discount broker's stock:

• The company's tax rate of 38 to 39 percent is among the highest in the space and can conservatively drop to 27 percent due to tax changes.
• E*trade is one of the more interest rate-sensitive stocks under the analyst's coverage, and every 25 basis point boost in rates translates to $60 million in incremental net interest income. 
• Retail trading activity is coming in 12 percent better than expected.
• Management's initiatives to improve E*Trade's business make it an attractive acquisition target.

Morgan Stanley's $63 price target is based on a 17x multiple on the analyst's 2019 EPS estimate, which implies only a one-turn discount to the historical multiple of 18x.

Price Action

Shares of E*Trade were up 1.45 percent at $50.54 at the time of publication. 

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