[Updated 11/15/2021] Update from Charles Schwab
Charles Schwab share (NYSE: SCHW) has gained 55% year-to-date, and at its current price of $ 82 per share, it is nearly 10% below its fair value of $ 92 – Trefis estimate for Charles Schwab’s assessment. The company reported better-than-expected results in the first two quarters of 2021, which also continued into the third quarter. Net income increased 87% year-on-year in the quarter to $ 4.6 billion, mainly driven by a 51% growth in net interest income coupled with a more than 4-fold increase in income from negotiation. In addition, asset management and administration fees increased 28% year-on-year. This translated into 129% year-on-year growth in adjusted net income to $ 1.4 billion.
The company completed the acquisition of TD Ameritrade in the last quarter of 2020. As a result, interest earning assets, client assets and active trading accounts saw a significant jump. It announced 9% year-over-year growth in revenue in 2020 to $ 11.7 billion, mainly due to the impact of the acquisition. While SCHW posted strong revenue growth in the first nine months of fiscal 2021 – up 84% year-on-year to $ 13.8 billion, this was in part due to the acquisition of TD Ameritrade and in part to asset growth. Notably, Charles Schwab’s paid assets grew 48% year-on-year between December 2020 and September 2021 to $ 555 billion, followed by a 14% growth in total client assets to $ 7.61 trillion. during the same period. Going forward, we expect asset growth to continue in the fourth quarter as well. However, interest rate headwinds will partially offset the positive impact of asset growth on net interest income. In addition, the economic recovery and the Fed’s decision to reduce bond purchases should normalize trading volumes over the coming months. All in all, we expect Charles Schwab’s income earn $ 18.4 billion in fiscal 2021. In addition, the company’s adjusted net profit margin is expected to remain close to the level of the previous year. However, higher revenues will likely allow adjusted net income to hit $ 4.7 billion. This will raise the EPS figure to $ 3.30 which, together with a P / E multiple just below 28x, will lead to a valuation of $ 92.
[Updated 08/16/2021] Is Charles Schwab stock undervalued?
Charles Schwab share (NYSE: SCHW) gained 42% YTD, and at its current price of $ 74 per share, it is almost 10% below its fair value of $ 82 – Trefis estimate for Charles Schwab’s assessment. Brokerage The giant recently released its second quarter 2021 results, with revenue and profits above consensus estimates. It reported net income of $ 4.5 billion, 85% more than a year ago, mainly thanks to a 40% growth in net interest income coupled with a 4-fold increase in income from negotiation. In addition, asset management and administration fees grew 31% year-on-year during the quarter. Notably, the company completed the acquisition of TD Ameritrade in October 2020, which is the main reason for the increase in revenues.
The company’s revenue of $ 11.7 billion in 2020 was 9% higher than in 2019. Growth was primarily achieved in the fourth quarter due to the acquisition of TD Ameritrade. In addition, SCHW reported 80% year-over-year revenue growth in its first quarter 2021, primarily driven by higher net interest income (NII) and trading income. The same trend continued in the second quarter of 2021 as well. Notably, Charles Schwab’s paid assets increased 41% between December 2020 and June 2021 to reach $ 531 billion. In addition, its total client assets grew 13% to $ 7.6 trillion during the same period. Going forward, we expect the NII to improve further over the year with asset growth partially offset by a lower interest rate environment. In addition, unusually higher trading volumes are expected to normalize as the economy improves, although this will take some time. All in all, we expect Charles Schwab’s income earn $ 18.3 billion in fiscal 2021, 56% more than the 2020 figure. In addition, the company’s adjusted net profit margin is expected to improve somewhat in 2021. This, coupled with higher revenues, will likely translate into adjusted net income of $ 4.9 billion, up about 60% year-on-year. This will bring EPS to $ 3.48 which, together with a P / E multiple just below 24x, will lead to a valuation of $ 82.
[Updated 06/25/2021] Charles Schwab share has limited rise
Charles Schwab share (NYSE: SCHW), the largest brokerage firm in the United States, gained around 37%, from around $ 53 at the start of 2021 to around $ 73 currently, outperforming the S & P500, which rose 13% in during the same period. The brokerage giant has beaten consensus estimates over the past two quarters, mainly on the back of significant growth in total client assets and brokerage accounts. In addition, the company has seen a significant increase in the number of new customers and daily business activity in recent months. This sparked positive investor interest in the stock.
There were two main reasons for this growth: First, the approval of the $ 1.9 trillion stimulus package. Second, increased involvement of retail investors.
But is that all there is in the story?
Not quite, despite recent gains, Trefis estimates Charles Schwab’s assessment at around $ 76 per share – slightly above the current market price, based on a key opportunity and risk factor.
The opportunity we see is an improved trajectory for Charles Schwab’s income during the following quarters. The company reported revenue of $ 11.7 billion for full year 2020, 9% ahead of 2019 revenue. All of this growth was generated in the fourth quarter of 2020, where the company recorded a 60% year-over-year increase in revenue. This was due to the completion of the acquisition of TD Ameritrade in early October 2020, creating a brokerage giant. SCHW’s trading income benefited from higher trading activity in the market and increased participation from retail investors. Additionally, its asset management revenues grew 8% year-on-year, driven by the rise in assets under management (AuM) – AuM increased 11% year-on-year to $ 1.97 trillion. That said, this was partially offset by a 6% year-over-year decline in its net interest income (NII) due to the lower interest rate environment.
The company saw significant growth in the first quarter of fiscal 2021 – net revenues jumped 80% year-on-year to $ 4.7 billion. The increase is mainly due to a 22% growth in NII coupled with an increase of more than 5 times in trading revenues. While the NII mainly benefited from higher interest earning assets following the acquisition of TD Ameritrade, partially offset by headwinds in interest rates, trading income benefited from an increase in interest rates. average daily transactions at 8.4 million. On the other hand, trade volumes are expected to normalize as the economy recovers. But that might take some time. Overall, we expect SCHW’s revenue to reach $ 18.1 billion in fiscal 2021, up 55% from the 2020 figure.
The adjusted net profit margin is expected to see some improvement during the year due to higher revenue growth. As a result, the company’s net profit is expected to increase 69% year-over-year to $ 5.1 billion, leading to EPS of $ 3.66. EPS of $ 3.66, coupled with a P / E multiple just below 21x, will lead to a valuation of around $ 76.
Finally, how much should the market pay per dollar of Charles Schwab’s earnings? Well, to make almost $ 3.66 a year from a bank, you need to deposit about $ 366 into a savings account today, which is about 100 times the earnings you want. At the current SCHW stock price of around $ 73, we’re talking about a P / E multiple of around 20x. And we think a figure closer to 21x will be appropriate.
That said, brokerage and asset management remain a risky proposition. While growth is likely, a change in current market sentiment can hurt the near-term outlook. What is behind this?
The securities markets have seen an increase in transaction volumes in recent quarters. This is also evident from the significant increase in SCHW’s daily trading volume in the first quarter of fiscal 2021. This spike is mainly due to greater participation of retail investors in the market – the company added 3.2 million new brokerage accounts during the quarter. Although the participation of retail investors has increased significantly, it should also be noted that they do not have a great loss capacity. Therefore, a sudden correction in the market price can lead to huge losses for them, push them into bankruptcy and hurt the turnover of the company. In addition, any further deterioration in the economy can cause asset valuations to fall, negatively impacting asset management income. To sum up, we think the Charles Schwab stock is slightly undervalued.
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