SCHW Market Research & Analysis Report
Updated May 11, 2016

Growth and Balance Sheet

The Charles Schwab Corporation (SCHW) announced that its net income for the first quarter of 2016 was $412 million, comparable to $416 million for the fourth quarter of 2015, and up 36% from $302 million for the first quarter of 2015. Revenue grew 16% to $1.76 billion, above the consensus of $1.75 billion. Profit margin improved to 37.1% from 31.7%, while return on average common stockholders' equity increased to 13% from 10%. Total client assets at the end of the quarter was $2.56 trillion, up 1% from last year. Asset management and administration fees rose 9% year-over-year – boosted by a $61 million sequential improvement in money market fund revenue due to higher short-term rates and higher balances, but limited by market valuations that persisted below year-end levels for much of the quarter. Net interest revenue jumped 31% year-over-year, reflecting robust interest-earning asset growth during the past several quarters, and the firm’s greater sensitivity to the rise in short rates relative to the decline in the long end of the curve. Trading revenue rose 2%, as the volatility and particularly strong volume that characterized January and early February generally subsided through March. New retail brokerage accounts for the quarter totaled approximately 163,000, down 8% year-over-year; total accounts were 6.9 million, up 3% year-over-year. Held financial planning conversations with approximately 34,000 clients during the quarter, up 36% year-over-year. The company’s earnings growth was influenced by year-on-year improvement in gross margins from 88.59% to 91.63% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 34.69% to 39.41% compared to the same period last year. For comparison, gross margins were 88.74% and EBITDA margins were 38.68% in the last reporting period.

Valuation

Charles Schwab Corporation (SCHW) P/E stands at 27.13 above the industry average of 17.65, and above the S&P 500 average of 17.15 The company is currently trading above the maximum P/E ratio of 15x, and over the last five years, the company’s shares have traded in the range of 16.60x to 37.00 trailing 12-month earnings. SCHW's current Price/Sales of 5.71 is above the average of its industry of 2.36. SCHW’s head to head comparison to its main competitors shows that the company has gross margin above the peer average, and one that is above the industry average. The achieved operating margin of the company is below the average operating margin of the selected competitors, and it is above the industry average. The quarterly revenue is above the industry average and above its main competitors. The beta of 1.60 implies higher volatility of the stock with respect to the S&P 500. SCHW has shown positive earnings consistency over the last five years. Company’s earnings have increased by 22% over the same period. The current quarter earnings in comparison to the same quarter last year are 36.36%. SCHW’s Total Debt/Equity of 960.28 is negative. The stock is currently trading below its intrinsic value of $29.462 this suggests that the stock is undervalued at these levels. SCHW’s current price levels are above the maximum level, is trading 27.85 below the 52 week high of $35.724, and the technical analysis give a neutral view of the stock. The majority of analyst ratings are bullish. SCHW dividend yield stands at 0.60%. 

About SCHW

The Charles Schwab Corporation (CSC) is a savings and loan holding company. Through its subsidiaries, the Company engages in wealth management, securities brokerage, banking, money management and financial advisory services. The Company provides financial services to individuals and institutional clients through two segments: Investor Services and Advisor Services. The Investor Services segment provides retail brokerage and banking services to individual investors, retirement plan services and corporate brokerage services. The Advisor Services segment provides custodial, trading, and support services to independent investment advisors (IAs) and retirement business services to independent retirement plan advisors and record keepers. The Company offers a range of products to address individuals' varying investment and financial needs. Its product offerings include brokerage, mutual funds, exchange-traded funds (ETFs), advice solutions, banking and trust.

Competitor Comparison

The Charles Schwab Corporation (NYSE: SCHW) N.V.

Highlights

The Company's subsidiaries include Charles Schwab & Co., Inc. (Schwab), Charles Schwab Bank (Schwab Bank) and Charles Schwab Investment Management, Inc. (CSIM). Schwab is a securities broker-dealer with approximately 330 domestic branch offices in over 45 states. Schwab Bank is a federal savings bank located in Reno, Nevada. CSIM is the investment advisor for Schwab's mutual funds, referred to as the Schwab Funds, and Schwab's exchange-traded funds (ETFs), referred to as the Schwab ETFs.The stock closed yesterday’s trading session at $27.94. In the past year, the stock has hit a 52-week low of $21.51 and 52-week high of $35.72. SCHW has a market cap of $36.92 billion and is part of the Financial sector.

• Ability to maintain leadership status in discount brokerage
• Diversified business model reducing business risk  
• Strong asset liability management practices      

• High operating expense likely to affect margins
• Lack of presence in emerging markets
• Stock market volatility

SCHW Intrinsic Value

Stock Valuation Model & Intrinsic Value Definitions

Investors should keep an eye open for stocks that are trading within 15% of their 52-week highs, as it is likely to continue in its upward trend. SCHW’s 52 week high is $35.72 current price is 27.94, is 27.85% below the 52 week high. 

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. The company has a P/E ratio of 27.13 above the average industry P/E ratio of 17.65 and is above the S&P 500 P/E ratio of 17.15. 

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders. Insiders own 12.78% of SCHW stock. Management's representation is large enough. This does satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

SCHW is trading in the range of $26.27 - $30.23 in the past 30 days. The stock has been showing support at $26.40 and resistance in the $29.90 range. The stock is trading below the 50-Day Moving Average and below the 200-Day Moving Average. The RSI(14) is 47.43. Our indicators give a neutral view on SCHW. 

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Investor’s sentiment for the stock.

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com is 5 Buy, 8 Outperform, 7 Hold, 0 Underperform and 0 Sell.

We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. SCHW’s annual EPS for the last 5 years were 0.70, 0.69, 0.78, 0.96, 1.03, this type of earnings action is positive. 

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry. SCHW’s have total debt/equity ratio of 960.28% which is not acceptable.

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. SCHW’s EPS growth for this quarter relative to the same quarter a year earlier is 36.36%.

This stock valuation model looks for annual earnings growth above 18%, but prefers higher than 25%. SCHW’s annual earnings growth rate over the past five years is 22%, passes this test.

¹Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.