2023-12-28 04:08:14 ET
Summary
- Charles Schwab is a top-tier investment services firm with exceptional brand awareness and a trusted reputation.
- The company recently completed a merger with TD Ameritrade, expanding its offerings and platform and arguably is better positioned than ever before.
- Schwab's stock has rallied 29% in the past six months yet is still down 15% year-to-date.
Investment Thesis
In essence, Charles Schwab (SCHW) is a name and brand I'd gladly own. Regardless of industry specifics, valuations, or margins, we're talking about a top-tier company with exceptional brand awareness. That's Charles Schwab.
A leading investment services firm with $8.18 trillion in client assets, Schwab's trusted brand boasts over 50 years of experience. It recently expanded even further through its $26 billion acquisition of TD Ameritrade. While I believe the current administration under Rita Kahn might have blocked this merger in 2019, we're now post-merger, with TD Ameritrade's services and user-friendly platform seamlessly integrated with Schwab's offerings and platform.
But enough about that, let's talk stock. 2023 has been a rollercoaster for SCHW. Down 16% YTD , it has nonetheless rallied 29% from its lows in the past six months. I was a strong proponent of buying Schwab when it dipped into the $40s and $50s earlier this year, viewing the company as "too big to fail."
SCHW YTD Chart (Seeking Alpha)
At the current price of $69 per share, it's safe to say that investor concerns about Schwab's liquidity, debt, and balance sheet have likely subsided. This is further supported by CEO Walt Bettinger's comments during the third quarter, where he...
Schwab gathered $46 billion in core net new assets and successfully completed the single largest conversion event in our industry's history. During those three days, we transitioned $1.3 trillion in client assets - including more than 7,000 Registered Investment Advisors (RIA) served by the Ameritrade Institutional business and 3.6 million retail accounts.
In my opinion, Schwab now finds itself in a stronger position than before the significant price drop. Management has adeptly navigated the financial landscape, strategically converting notes and ensuring a steady influx of capital, as befits a brand of such magnitude and recognition. This resilience is further underscored by its robust market capitalization of $125 billion, even after receding from its peak of $170 billion. Compared to peers like Morgan Stanley (MS) ($152 billion) and Goldman Sachs (GS) ($132 billion), Schwab trades at a discount, suggesting considerable potential for further growth.
SCHW Market Cap Comp. (Seeking Alpha)
To further bolster the bullish case, consider Schwab's attractive valuations based on its projected earnings growth. Reaching the $90 price range and potentially even challenging its all-time highs isn't a matter of "if," but a matter of "when" in my eyes.
SCHW Earnings Estimates (Seeking Alpha)
While Charles Schwab doesn't currently meet my usual standard of a 3x risk-reward ratio for a "buy" rating, I'm still bullish on the stock due to its exceptional brand reputation and strong growth potential. Ideally, I would prefer to enter at a lower price point to improve the risk-reward profile, but even at the current price around $69, I see significant upside. My bullish scenario suggests a 35% potential gain, pushing the stock close to its all-time highs at $93 per share.
For investors seeking exposure to a financial company with a combination of long-term growth and value potential, coupled with a respectable 1.5% dividend yield, Schwab presents a compelling opportunity. I strongly recommend it as a solid addition to diversified portfolios.
In short, Schwab is a brand worth owning.
Price Target and Valuations
While the market always looks ahead, with a forward P/E of 18.3x based on next year's earnings estimate, Schwab doesn't appear excessively expensive but rather close to fair value. However, analyst forecast suggest an EPS re-acceleration, which could propel the P/E into the low 20s, a level it has historically achieved. This potential multiple expansion, fueled by both top- and bottom-line growth, could be a recipe for shareholder success.
To illustrate this potential, I've created a basic price target scenario table using Schwab's estimated EPS and historical P/E ranges. As you can see, compared to fair value, the stock currently trades at an 8% discount in my base case. However, my more optimistic bull case scenario envisions a climb back towards the $90s.
Of course, investment always carries risk. Given the uncertain global and political environment, the potential reward-to-risk ratio sits at 2.2x, reflecting the possibility of downward turns. Nevertheless, Schwab's solid fundamentals and long-term growth prospects make it a compelling option for investors seeking a well-positioned financial play.
SCHW NTM Price Target Scenario (Author Calculations Based on Analyst estimates From Data on S.A.)
Zooming out to a two-year perspective, the picture brightens further. Applying the same metrics but with 2025 EPS estimates instead, we see even more upside for Schwab.
SCHW 2 Year Price Target Scenario (Author Calculations Based on Analyst estimates From Data on S.A.)
To delve deeper into Schwab's potential, I've also generated a price target using a discounted dividend growth model. This model incorporates the company's current financials, dividend yield, and historical and projected dividend growth rates to estimate future value. While Schwab boasts a robust five-year dividend growth rate of nearly 17%, I've employed conservative assumptions for future growth. Even with these modest projections, the model reveals a compelling opportunity, indicating a roughly 45% discount compared to a price target based on the next two to three years' potential.
SCHW Dividend Growth Model (Author Calculations)
I reiterate my "buy" rating for Schwab based on its reasonable current valuation and significant room for future growth. The steady top- and bottom-line growth expected over the next few years should further bolster cash flow, enabling the company to continue its robust capital return program to shareholders.
There will undoubtedly be a point where Schwab's price becomes less attractive, making the risk-reward equation less compelling. Take advantage of the opportunity presented by the 2023 dip and consider adding Schwab to your portfolio before it runs further. It's not too late, but the window of opportunity might not stay open forever.
Risk
As with all investments, Schwab carries its own set of risks. Notably:
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Valuation Risks: Based solely on current P/E and EPS estimates, the stock could face downside pressure. If the market corrects in 2024 and management encounters challenges, a 16% decline to the $50s is within the realm of possibility, resulting from a contraction in its P/E multiple from 18x-19x to 15x-16x.
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Interest Rate Sensitivity: Schwab's earnings are heavily tied to interest rates in the coming years. Due to the staggered reinvestment of its portfolio, higher rates are needed for full repricing. Analysts previously expressed concern about Schwab's debt holdings at low rates, fearing insufficient cash to navigate a sustained high-rate environment. However, recent evidence suggests Schwab has adequate liquidity and has improved its bond portfolio management.
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Market Shifts: Market and economic uncertainty pose a smaller risk. Asset-management revenue could decline if investors shift from actively managed products, including Schwab's proprietary and mutual funds with higher yields, towards passive solutions. This would be cyclical and vary with market sentiment.
Despite these risks, Schwab's attractive valuation, potential for growth, and improving financial management offer compelling reasons for a buy recommendation.
Conclusion
Despite a challenging 2023, I remain firm in my belief that Schwab is not only a solid hold but also a compelling buy at current prices. Its valuation appears fair and even attractive on a forward basis, particularly considering its recent emergence from the largest financial acquisition in history. This transformative event positions Schwab to be stronger and more complete than ever.
The company boasts a comprehensive suite of products and services, a robust workforce, and most importantly, an industry-leading brand reputation. As wealth creation continues and asset management remains a crucial need, Schwab is well-positioned to flourish. Management has demonstrated their competence in navigating the past year's challenges, further solidifying my optimism for the company's trajectory in 2024 and beyond.
To echo my opening sentiment, Charles Schwab is a name you want to own. Its combination of strong fundamentals, attractive valuation, and promising future outlook make it a worthy addition to any diversified portfolio.
Editor's Note : This article was submitted as part of Seeking Alpha's Top 2024 Long/Short Pick investment competition , which runs through December 31. With cash prizes, this competition -- open to all contributors -- is one you don't want to miss. If you are interested in becoming a contributor and taking part in the competition, click here to find out more and submit your article today!
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Charles Schwab: Is It Too Late To Buy?