Charles Schwab (SCHW) is a leading provider of financial services, with 33.9 million active brokerage accounts and approximately $8 trillion in client assets, notes Steve Biggar of Argus Research, a leading independent Wall Street research firm.

On July 18, Schwab reported adjusted 2Q22 EPS of $0.97, up from $0.70 a year earlier and above the consensus of $0.91. Revenue rose 6% in 2Q, reflecting strength in net interest revenue, which rose 31%, partially offset by lower trading revenue.

We expect Schwab’s long-term revenue drivers to remain asset management fees and net interest income, which together account for about 70% of revenues. Positive drivers also include strong account growth, innovative low- cost products that are taking market share, and operating expense leverage.

While industry competition remains heated, Schwab now has, by far, the largest number of active brokerage accounts in the industry, and we believe that it has managed competition well. Schwab’s proprietary ETFs have generally remained a strong source of asset growth, along with other third-party ETFs. ETF assets totaled $1.37 billion at the end of 2Q, down 3% from the prior year.

The development of innovative, scalable digital tools has aided the company in acquiring and engaging clients. In July 2022, Schwab introduced new digital onboarding tools aimed at helping independent advisors increase efficiency.

We also believe that Schwab remains at the forefront of many important industry trends, including business consolidation, reduced fees, and the increasing focus on lower-cost investment vehicles, including passive index funds.

We expect Schwab to post above-peer-average growth thanks to its innovative products and continued market share gains. Schwab has rapidly grown core net assets and continues to take cost-conscious clients from other financial services providers.

SCHW shares have traded between $59 and $96 over the past 52 weeks and are currently near the bottom of that range. The shares have sold off in 2022, which we believe reflects the challenging environment for asset levels and trading revenues, although higher interest rates remain a strong tailwind for net interest income.

SCHW shares currently trade at 16-times our 2022 EPS estimate and at 13-times our 2023 estimate. However, we believe that SCHW merits higher multiples based on the company’s strong EPS growth prospects relative to peers, supported by market share gains and a long history of product innovation. Our revised target price of $90 (lowered from $100) implies a multiple of 18-times our 2023 EPS estimate.

Subscribe to Argus Research here…