2023-06-19 03:58:33 ET
Summary
- Charles Schwab attracted $20.7B in core net new assets in May. Total client assets to $7.65T, showing 5% Y/Y growth.
- The financial services company is currently valued at 13X forward earnings, well below its historical average of 19X.
- Despite revenue headwinds from higher interest rates, Charles Schwab's growth in core net new assets and low valuation make it an attractive recovery investment.
According to Charles Schwab's ( SCHW ) latest monthly activity report, published on June 14, 2023, the financial brokerage company continued to see an inflow of core net new assets in the amount of $20.7B in May which brought total year-to-date inflows to a massive $150.1B. Charles Schwab also attracted core net new assets during the financial crisis earlier this year and although the company has also guided for “temporarily compressed net interest margins”, I believe that the financial services company offers investors deep value as well as up to 38% recovery potential in FY 2023 and beyond. Insiders and hedge funds have increased their exposure to the brokerage in the first-quarter. Shares of Charles Schwab are currently valued at only 13X forward earnings which is well below the company’s historical average and the risk profile is favorable, in my opinion!
Monthly activity report shows positive business momentum in core net new assets
Charles Schwab attracted a considerable amount of net new assets in recent months which was an encouraging sign that investors continue to trust the financial services franchise. According to the brokerage's latest activity report for the month of May, published last week, Charles Schwab attracted $20.7B in core net new assets from clients. This brought the brokerage's total client assets to $7.65T, showing a year over year increase of 5%. In the first five months of FY 2023, Charles Schwab saw the inflow of a massive $150.1B in core net new assets, despite major turmoil in the U.S. regional banking market. Obviously, investors still trust Charles Schwab and feel comfortable placing their funds with the financial services company.
Historically, Charles Schwab’s core net new assets have increased between 5-7% annually, for the most part, with growth moderating in years of weak S&P performance and heightened market uncertainty. However, the fact that Charles Schwab has seen core net new asset inflows in four of the last five months, despite extraordinary stress levels in the regional banking market, attests to Charles Schwab’s strength as a financial services franchise. Additionally, the brokerage saw record asset inflows at the height of the financial crisis in March, attracting a record $53.9B in new assets to its platform.
The smart money bought Charles Schwab as regular investors sold
Both insiders and hedge funds have increased their exposure to Charles Schwab just as retail investors ditched the financial brokerage in March... something that I believe is worth pointing out. Bank executives aggressively bought the firm's shares during the March meltdown and Charles Schwab's CEO acquired 50,000 shares at an average price of $59.31. With shares currently trading at $54.40, investors can Charles Schwab at an 8% discount compared to what the firm's CEO paid.
Hedge funds also increased their exposure to Charles Schwab in the first-quarter with a record 89 firms owning shares of the financial brokerage. In other words: just when regular investors sold into the weakness, the smart money aggressively acquired shares of the deeply discounted financial services company.
Charles Schwab’s valuation remains deeply discounted
Besides being able to attract new client assets in a difficult market, I believe the best reason to buy the financial services company right now is its low valuation based off of earnings. Charles Schwab is currently valued at a price-to-earnings multiplier of 13X which is well below the firm’s longer term average of 19X, implying a discount of approximately 30%. I believe that Charles Schwab has considerable revaluation potential in FY 2023 and that the firm has a good chance of restoring its pre-crisis valuation over time. If Charles Schwab’s shares return to their pre-crisis level of $75, SCHW could have revaluation upside of 38%!
The EPS estimate trend has been negative in the first-quarter as uncertainty fueled estimate revisions, but the trend has stabilized in recent weeks. Analysts chiefly expect lower profitability resulting from higher interest rates and a more expensive deposit base.
Risks with Charles Schwab
Charles Schwab guided for a 10 to 11% decrease in its net interest margin for the second quarter, citing "temporarily compressed NIM and a smaller interest-earning asset base." However, as the interest environment normalizes over time and the Fed slows (or reverses) rate increases going forward, Charles Schwab should be able to restore its full earnings power. Since the long term trend in client asset growth is positive, I believe the risks with Charles Schwab are actually very low.
Final thoughts
I believe that Charles Schwab continues to see positive business momentum and the attraction of almost $21B in core net new assets just in May underlines this. While Charles Schwab sees revenue headwinds coming from higher interest rates, the longer term trend in core net new asset growth is the real reason why investors should consider a long position in the brokerage. Shares, in my opinion, remain deeply undervalued with the price-to-earnings ratio of 13X. Considering that Charles Schwab has so far not recovered its valuation losses sustained during the March sell-off, I see Charles Schwab as a highly attractive recovery play with a risk profile that remains skewed to the upside!
For further details see:
Charles Schwab: Massive Revaluation Potential In 2023