2023-04-25 14:07:47 ET
Summary
- Charles Schwab has lost about 30% of its market value since the failure of SBV.
- With that said, the brokerage has substantial liquidity and is seeing deposit growth.
- The fact that deposits are growing flies in the face of market concerns about Schwab’s liquidity.
- The stock is too cheap to miss.
Charles Schwab Corporation ( SCHW ) has taken a significant valuation hit since the outbreak of the latest U.S. bank crisis last month, despite the fact that the financial firm was not directly impacted.
While the failure of SVB and other banks has caused renewed panic in the banking sector, Charles Schwab is well-funded and should not have experienced the valuation decline that it did.
Since the failure of Silicon Valley Bank, Charles Schwab's market value has dropped by approximately 30%, and the company is now very attractively valued.
I believe the market is mistaken in giving Charles Schwab a 13x earnings multiple, and given the company's access to substantial liquidity and deposit growth, I believe the stock is a steal.
Charles Schwab Is Seeing Money Inflows And Has Substantial Liquidity
The failure of Silicon Valley Bank triggered a minor bank crisis in the United States, which also brought down crypto-focused Silvergate Bank and Signature Bank last month. These banks failed due to liquidity problems, not mismanagement or risky investments on the part of bank management. Customers of SVB, for example, attempted to withdraw $42 billion in deposits from the bank on a single day in March.
I believe that the biggest mistake that many investors are making right now is comparing Charles Schwab to Silicon Valley Bank, which focused on venture customers.
Furthermore, according to Charles Schwab's 1Q-23 earnings, the company has seen $53 billion in new client assets flow into the financial company during the month of March and a total of $132 billion in the first quarter.
According to the company, March asset inflows were the second-largest in history, demonstrating that Charles Schwab is viewed as a safe harbor rather than an at-risk broker dealing with massive money outflows.
Furthermore, Charles Schwab's CEO stated in March that the company had sufficient liquidity ( in excess of $100 billion ), while also stating that the company had access to $300 billion in additional liquidity via the Federal Home Loan Bank and other short-term facilities.
Simply put, I believe that the fear surrounding Charles Schwab is largely unfounded and that the company should not have seen such a large loss of value in March.
Technical Situation Of Charles Schwab: About To Be Oversold
Since the start of the U.S. bank crisis and the failure of Silicon Valley Bank, Charles Schwab's valuation has been reduced by 34%. According to the Relative Strength Index, Charles Schwab is not oversold anymore, with an RSI value of 44.52, but the stock still looks very compelling to me from a technical standpoint. Furthermore, the stock is also extremely cheap in terms of future earnings, and I see no reason why SCHW couldn't fully recover its valuation loss.
Insiders Loaded Up The Truck With Shares Of Schwab As Fear Spiked
Key executives at Charles Schwab purchased shares of the company just as retail and institutional investors were selling them. Given that executives are often in a unique position to assess their company's true value proposition, I believe investors should interpret the insider transactions as an expression of trust and confidence in Charles Schwab.
Since the failure of Silicon Valley Bank, Charles Schwab insiders have purchased 140.8K shares at average transaction prices of $50-60. With Charles Schwab's stock price falling below $50 last week, investors can now purchase SCHW for a price lower than many insiders paid.
A Potential Safe Haven Investment During Times Of Crisis
With investors moving cash to Charles Schwab during the bank crisis, I believe the broker should be viewed as a safe haven investment for those investors who are unsure what to do with their cash. Charles Schwab runs a very profitable financial business, with a strong ROE of 23% in the first quarter and adjusted profits of $1.8 billion.
Earnings were up strongly during the last quarter, despite the huge upheaval caused by SVB's failure. I think Charles Schwab does not get enough credit for its strong underlying earnings power, and it is reflected in the company's valuation.
The financial company profits in down and up markets from increased trading and also markets plenty of other investment products, like funds, to investors.
Charles Schwab's profitability may improve further in the future as the acquisition of TD Ameritrade adds to the broker's organic account growth.
In 2019, Charles Schwab's acquisition of TD America reduced market competition and resulted in Charles Schwab acquiring 12 million client accounts worth $1.3 trillion.
The Stock Is Cheap
Charles Schwab's profits are expected to be $3.37 per share in 2023 and $4.20 per share the following year, representing a 25% YoY growth. Importantly, with profits of $4.20 per share expected in 2024, Charles Schwab has a very low earnings multiple of 12.8x.
A month ago, Charles Schwab cost investors nearly 16x profits (2024), and nothing has changed fundamentally for the company. I believe the valuation level here is extremely compelling.
Investment Risks With Charles Schwab
Charles Schwab is a financial company that is reliant on the overall health of the United States banking system. A contagion, while unlikely, would most likely affect all financial institutions, including top-tier commercial banks such as Bank of America ( BAC ) and Wells Fargo ( WFC ) , as well as investment fund companies and brokers such as Charles Schwab.
Unless Charles Schwab reports asset outflows rather than inflows, I believe the market's concern about the broker is misplaced.
My Conclusion
It's not often that I get excited about a cheap stock, but this is definitely the case with Charles Schwab.
Since the outbreak of the U.S. bank crisis, the company has seen an unfairly large valuation haircut, in my opinion, and I believe investors are getting a steal here, particularly because Charles Schwab is very profitable.
Charles Schwab has substantial access to liquidity and could, if necessary, fund deposit outflows by tapping liquidity lines at the Federal Home Loan Bank or even the central bank's crisis facility, the Bank Term Funding Program.
Furthermore, the U.S. government has a strong interest in restoring trust in the U.S. banking system, so Charles Schwab, in my opinion, is highly unlikely to fail.
Finally, with Charles Schwab reporting $53 billion in asset inflows in March and the stock trading at a 13x earnings multiple, I believe investors get a very high margin of safety here.
For further details see:
Charles Schwab: Deposit Growth, Shares Look Like A Steal