Assets Under Management AUM

Charles Schwab share has a limited rise – Trefis

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-over-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 would have to deposit around $ 366 into a savings account today, which is roughly 100 times your desired earnings. 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 increased 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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