The Zacks Analyst Blog Highlights: E*TRADE Financial, General Electric, Discover Financial Services, American Express and Capital One Financial

Nov 19, 2013, 09:30 ET from Zacks Investment Research, Inc.

CHICAGO, Nov. 19, 2013 /PRNewswire/ -- announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the E*TRADE Financial Corporation (Nasdaq: ETFC---Free Report), General Electric Company (NYSE: GE---Free Report), Discover Financial Services (NYSE: DFS---Free Report), American Express Company (NYSE: AXP---Free Report) and Capital One Financial Corp. (NYSE: COF---Free Report).


Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Monday's Analyst Blog:

E*TRADE Upgraded to Outperform


On Nov 13, 2013, we upgraded our long-term recommendation on E*TRADE Financial Corporation (Nasdaq: ETFC---Free Report) to Outperform from Neutral based on strong third-quarter 2013 earnings. Decrease in expenses reflects the company's successful cost reduction initiatives. Further, E*TRADE's decision to focus on core operations and exit the market making business is expected to improve profitability.


Why Outperform?

Though earnings per share of 16 cents were in line with the Zacks Consensus Estimate, it improved significantly from the net loss of 10 cents reported in the prior-year quarter. A rise in total daily average revenue trades (DARTs) and prudent expense management were the positives for the quarter. Moreover, decrease in provisions and a strong capital position were the tailwinds. However, reduced revenues remain a matter of concern.

Though volatility in equity markets has affected the level of DARTs over the past few years, the recent rebound in equity markets has been favorable for the company. Notably, DARTs for the nine months ended Sep 30, 2013 nudged up 5% year over year to 147,777. Moreover, the company's aggressive focus on loss mitigation strategies such as short sales, loan modifications and transfers to better servicers are expected to enhance DARTs in the coming months.


We also commend the company's efforts to ease its balance sheet risk by reducing credit risk in its loan portfolios. Further, cost reduction initiatives undertaken by the company are expected to be profitable in the future.


Following impressive third-quarter 2013 results, the Zacks Consensus Estimate over the last 30 days for 2013 increased 6.3% to 68 cents. For 2014, the Zacks Consensus Estimate rose 7.7% to 84 cents per share, over the same time frame.



GE Plans Finance Arm Spin-Off to Cut Credit Risks


In its concerted effort to reduce credit risks, General Electric Company (NYSE: GE---Free Report) is planning to shrink its finance business by 2015 through the divesture of its North American consumer lending unit. The strategic move is arguably the biggest step in restructuring GE Capital's portfolio to shield the parent company from intense market volatilities that plagued the market during the 2008-09 financial crisis.

The Spin-Off

The North American consumer lending business includes credit cards to retail giants like Wal-Mart Stores and J. C. Penney Company. General Electric will sell 20% of this business through an IPO in 2014. The remaining shares of the unit will be distributed to the shareholders of the parent company in a tax-free transaction.

Post-recession, General Electric has been steadily dismantling its real estate and home loans to strengthen the balance sheet of GE Capital. Ending net investment or ENI (excluding cash and cash equivalents) for GE Capital, a measure of its balance sheet, dropped to $384.6 billion at the end of third quarter 2013 from $556 billion in 2008. With the divesture, General Electric anticipates to reduce it further to around $300 billion.

The new entity will operate as a standalone company valued at about $16 billion to $18 billion, competing with other players in the industry such as Discover Financial Services (NYSE: DFS---Free Report), American Express Company (NYSE: AXP---Free Report) and Capital One Financial Corp. (NYSE: COF---Free Report). The divesture is expected to reduce the total outstanding shares of the company to approximately 9 billion to 9.5 billion from 10.12 billion at present.

Strategic Shift in Balance

With the spin-off, General Electric intends to focus more on its industrial business and expects operating profit to aggregate 65% of the total operating earnings of the company by 2015. The company also expects to record a profit of approximately $1 billion from the divesture of its retail fiancé business.

The gradual rebalancing of GE Capital's debt portfolio has further reduced credit-default swaps tied to debt to 69.9 bps – the lowest level since Jan 2008. As credit-default swaps typically decline with an improvement in investor confidence, it signifies that GE Capital is more creditworthy to derivative traders at present than it was before. This further offers a lucrative option to exit the market on a high.  

Moving Forward

The spin-off will realign the corporate strategy of the company to a manufacturing-based entity with emphasis on big-ticket items such as medical equipment and scanners.

General Electric is one of the largest and the most diversified technology and financial services corporations in the world. With products and services ranging from aircraft engines, power generation, water processing, and security technology to medical imaging, business and consumer financing, media content, and industrial products, the company serves over 100 million customers worldwide. Its segments include Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, Home & Business Solutions, and GE Capital.


General Electric currently has a Zacks Rank #3 (Hold).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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