Is E*TRADE Worth The Gamble?

It’s been a busy week for E*TRADE (ETFC) Financial. E*TRADE’s shares rose 7% to $1.62 Tuesday on news of a debt upgrade by Standard & Poors. This is one day after shares were down big after the company introduced its new CEO and announced a 1 for 10 reverse stock split.

 E*TRADE’s shares have been battered over the past two years. The online brokerage firm is still trying to recover from the subprime mortgage crisis. E*TRADE had 3 billion dollars in asset backed securities and collateralized debt obligations. ETRADE sold these obligations but the firm has struggled to find its financial footing. Analysts are forecasting a .03 per share loss for 2010 and a gain of .08 per share for 2011.

The company has been a rumored takeover target for the past 2 years despite denials from other brokerage firms. While the company’s brokerage accounts would be attractive to another broker/dealer; E*TRADE’s balance sheet has a few issues. E*TRADE has twice as much debt as cash and a negative ROE. Even though the company has a market cap of $3.1 billion, the enterprise value is $9.55 billion. Revenue and profitability are continuing to decline. On the plus side, E*TRADE is trading below book value and below cash per share.

For investors looking for a speculative buy, E*TRADE looks like an interesting play. The upside could be significant if the brokerage is taken over and the downside appears limited.