Schwab Updates Investors Next Week

| About: The Charles (SCHW)

Summary

3-year "expected" revenue and EPS growth of 14% and 26%.

Stock as oversold technically as 2011 decline.

Money mkt fee waiver in Q4 '15 down to $133 million or $0.115 per share.

Charles Schwab (NYSE:SCHW) the discount-brokerage, and 3rd-party custodian market leader, updates the investment community next week.

Consensus 2016 EPS and revenue for calendar 2016 remains $1.32 and $7.4 billion in revenue (as of Friday, February 5, 2016) for expected growth of 365 and 16% respectively.

Financials as a sector were crushed in January '16, down 10% versus Energy's decline of 5% as the leaders from last year were (and continue to be as today's writing) taken out and shot in a horrid group rotation that is still occurring today.

This morning's non-farm payroll report and the average hourly wage growth probably put at least another FOMC rate hike on the table this year, and Schwab is a beneficiary of that rate rise, given the money market fee waivers that cost SCHW $0.51 in EPS in 2015.

Here is a table of the money market fee waivers for 2015:

Quarter

fee waiver

per share

Total

fee waiver

q4 '15 $0.115 $153 ml
q3 '15 $0.125 $166 ml
q2 '15 $0.127 $168 ml
q1 '15 $0.139 $184 ml
Click to enlarge

Source: internal spreadsheet, earnings reports, 10-Q's

Schwab is trading at 20(x) 2016's EPS (probably lower given the recent drop) and as long as readers think that fed funds rate will creep up and eventually cover the money market fee, then the stock in my opinion continues to be cheap.

Off the Financial Crisis lows, SCHW's EPS has averaged 9% - 10% growth per year, so at the 20(x) multiple, even assuming the forward estimates don't materialize, then SCHW represents good value in the mid to low $20's.

To be clear I am an independent RIA that custodies all my client assets at Schwab, and have done so since 1995. It goes without saying I obviously get no benefit from this article, and in fact, Schwab can get my formidable Irish temper going like no other entity.

Mr. Schwab has operated the firm since its inception without any ethical issues and Schwab adroitly managed to avoid any substantive balance sheet or operating issues around the Financial Crisis of 2008.

Schwab continues to sport an A2/A credit rating and the highest commercial paper ratings.

That being said, share count has steadily risen over the years probably due to the share repo program being suspended thanks to the money market fee waiver, thus as much as the world doesn't seem to want higher short-term rates, Schwab benefits a number of ways if and when money market rates continue to rise further.

Q4 '15's fee waiver if it is sustained, means the annual fee waiver per share in 2016 is a $0.44 run rate versus the $0.50 last year, and that presumes no more rate hikes.

There are other reasons to like Schwab and TD Ameritrade (NASDAQ:AMTD) relative to the bigger brokers and those are that Chuck doesn't use the balance sheet for proprietary trading and the move to 3rd party custodianship in the late 1980's was really a stroke of genius, as the advisory business has steadily grown, while the traditional wire-house broker, although many brokers are quite good and ethical, they remain a higher-cost alternative to the independent fee-only crowd.

The recent volatility in Financials is hard to explain: if due to the DOL Fiduciary rule, then Schwab and the other asset-gathering custodians should be in good shape. The other rumor heard was that given the stress in the commodity business, there is a chance that a large European investment bank could default, and the rumor worries has impacted all the Financials. That should still leave Schwab in good shape, since their balance sheet isn't used for any proprietary trading

One noted Street Strategist thought that the commodity unwind wouldn't end until these was at least one, maybe two bankruptcies.

It has a been a painful start to 2016 but play the long game and look for value in sector declines.

Morningstar's fair value for Schwab is $32 per share leaving the stock at a 25% discount to current fair value at present.

The fact is, the sell-off could get worse, too, before it gets better, but it looks like the brunt of the correction has occurred already within the Financial sector.

Technically, Schwab is as oversold today as the late summer and fall of 2011, the last time we saw a 20% correction in the SP 500. If readers want a stop-loss level, the 200-week moving average of $23.44 would be a good point. A heavy volume trade below that level, and something else is afoot.

Disclosure: I am/we are long SCHW, SPY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.