Where Is Charles Schwab Stock Headed?

SCHW: Charles Schwab logo
Charles Schwab

Charles Schwab stock (NYSE: SCHW) has gained roughly 26% YTD as compared to the 21% drop in the S&P500 index over the same period. Further, at its current price of $62 per share, it is trading 32% below its fair value of $92 – Trefis’ estimate for Charles Schwab’s valuationThe company posted weak results in the first quarter of 2022, missing the consensus estimates for revenues and earnings. It posted net revenues of $4.7 billion, which was down 1% y-o-y. The firm reported a 21% drop in the trading revenues due to lower client trading activity on a year-on-year basis. However, the negative impact was almost offset by a 14% increase in the net interest income (NII) coupled with a 5% rise in the asset management and administration fees. While the asset management and administration fees benefited from the growth in total client assets, the net interest income was up because of improvement in interest-earning assets and higher average yields on investment securities. Altogether, adjusted net income decreased 8% y-o-y to $1.3 billion.

The company’s top line grew 58% y-o-y to $18.5 billion in 2021, partly because of the acquisition of TD Ameritrade and partly due to organic growth in the year. It reported growth in all the revenue streams – NII, asset management & administration fees, trading revenues, and bank deposit account fees. Notably, the trading revenues increased by 2x driven by significantly high client trading activity. All in all, the above growth in top-line and a favorable drop in total expenses as a % of net revenues resulted in a 76% jump in the adjusted net income to $5.36 billion.

The Federal Reserve has started the rate hike process in 2022. Notably, it has already increased the benchmark interest rates thrice in the year with more to follow. It will likely benefit the net interest income of the company. On the flip side, the trading revenues are anticipated to decline in the year, with improvement in the economic conditions. Overall, Charles Schwab’s revenues are forecast to remain around $20.96 billion in FY2022. Additionally, SCHW’s adjusted net income margin is likely to improve in the year, leading to an adjusted net income of $7.1 billion and an annual EPS of $3.80. This coupled with a P/E multiple of just above 24x will lead to the valuation of $92.

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 Returns Jun 2022
MTD [1]
YTD [1]
Total [2]
 SCHW Return -12% -26% 57%
 S&P 500 Return -7% -21% 84%
 Trefis Multi-Strategy Portfolio -6% -24% 199%

[1] Month-to-date and year-to-date as of 6/24/2022
[2] Cumulative total returns since the end of 2016

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