Charles Schwab Can Outshine Its Peers - Barron's

Investment brokerages aren't built to excel in extreme bear markets, but Barron's Michael Santoli says Charles Schwab (SCHW) comes closer to that ideal than any other firm. Schwab is a well-run asset-gathering machine, with steady revenue streams, pared down costs and branding as the 'honest broker.' All this means Schwab is in an excellent position to gain market share, even during the current economic turmoil.

Schwab's stock has fallen 30% this year, but has outperformed the S&P 500 and its discount-broker and asset-manager peers. Friday's closing price was $16.61 but if markets merely stabilize and trading volume doesn't collapse, shares could easily approach $20 again. Schwab is trading at 14 times estimated 2009 earnings and under 16 times trailing earnings, compared to its previous 20 times earnings. The company regularly provides a 30% return on equity, and has a pretax profit margin near 40%.

Schwab has collected a net $98.3B in client assets this year, bringing its total under supervision to $1.2T. The firm has limited balance-sheet leverage and doesn't do any proprietary trading. It's one of the largest money-fund managers, and oversees Schwab Bank. The bank boasts low fees, high-interest checking and conservative lending, and allows Schwab the opportunity to expand its share of customers' financial lives. CEO Walt Bettinger says "in times like this, consumers become focused on the core strengths of franchises... There is tremendous leverage in our model."

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• On Friday, Schwab confirmed it will not participate in the Treasury's bailout program. "Our capital strength, ongoing operating discipline, and history of conservative fiscal management allow us to continue to maintain the strength, safety and soundness of our business without the need for government capital," said chairman Charles Schwab in a statement.
• Charles Schwab (SCHW): Q3 EPS of $0.26 beats by $0.02. Revenue of $1.25B (-3.1%) in-line. (PR)

Comments

[bonddude:]

YEAH, BUT ! In the last month their assets were down 22%. Since less than 20% of revenues come from trading and rest is fees reduced assets should mean reduced fees, right? I don't deny they might be the best in the space but this stock, like the market should go lower, especially considering S&P's new projected earnings for the S&P 500. Yes, I know their trying to shift MM assets to the bank, which could help a little. Do I misunderstand?

2008 Nov 16 05:48 PM

[Deuce $:]

I think the key here is "Asset-Gatherer!" If you look back over the last few months of what has transpired with the finanical industry as a whole, you will see that raising $98 billion in this market environment means that clients have faith in them. I have also read that many of the finanical advisors working for Bear Stearns, Lehman, Merrill, etc. have started on their own and used Schwab to broker their client's trades. This not only brings in large assets but also brings in fees and commissions from trading. Granted trading isn't that popular these days, but if Schwab can keep gaining market share and large assets along the way, lookout when trading starts back up.

2008 Nov 16 11:10 PM

[bonddude:]

Don't disagree generally but a falling market presages falling multiples offsetting asset gathering gains as all assets are are shrinking in a falling market. For an asset gatherer this must mean a lower share price in the near term. Out 5 years it's all good but my point is it is going appreciably lower near term. I'll look at it at 10-12 p/s.

2008 Nov 18 10:55 AM