Why Etrade is undervalued:
Why I think the stock is worth $50 right now,
compared to Schwab.

This analysis is of 7/29/00 and might have some
holes in it. If you have any comments or
see faults, by all means speak up.

Basic facts:

EGRP SCH
Outstanding 291,710,000 1,258,190,000
shares

Current price 14.5625 34

Current PE NA 64

Market Cap. 4,248,060,000 42,778,560,000

Qtr. 6/30/00
Ad spending 115,081,000 77,100,000


Basic math:
How much money would Etrade have to earn to
have a PE ratio of 64 like Schwab?

P = price
ES = earnings per share
E = total earnings

If EGRP has a P of $50 and we want a PE of 64 then:

P/ES = 64
P = 64ES
50 = 64ES
ES = .78125

ES = E/Outstanding shares
.78125 = E/291,710,000
E = 227,898,437

So EGRP has to have earnings of $227,898,437 to
justify a PE of 64

Last quarter Etrade spent 115,081,000 on marketing.
Which is $460,324,000/yr.

If they cut advertising in one half they will have earnings
that will justify a PE of 64 and a
STOCK PRICE OF $50.
Remember Schwab has a PE of 64.
Remember also that this does not take into fact how
fast EGRP is growing.

My Biased Opinions and Misc. Facts:

EGRP can cut back in advertising by half and still outgrow Schwab.
EGRP owns a bank, Schwab doesn't.
EGRP doesn't have all of the brick and mortar expenses that SCH does.
EGRP is expanding globally much faster than SCH.
I could go on, but you probably get the drift.


Doug