Charles Schwab (SCHW) is a leading provider of financial services, with 33.8 million active brokerage accounts and approximately $7.0 trillion in client assets, notes Stephen Biggar, an analyst with the leading independent Wall Street research firm, Argus Research.

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 in most quarters, 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 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 the 2020 TDAmeritrade acquisition to generate substantial expense synergies and to provide the company with a larger share of the RIA custodial market. Synergies here are taking a while to play out as the company works to integrate the two firms’ platforms with as little customer loss as possible.

Overall, we look for an 11% increase in revenue in 2023, led by net interest income, along with an 8% rise in asset management fees and a 3% increase in trading revenues. We expect long-term market share gains through innovative, competitively priced products, with asset growth well above the industry average.

We rate the financial strength of Schwab as High, the highest rank on our five-point scale. The company achieved an 18% return on equity in 4Q22, helped by its strong balance sheet and efficient capital management.

SCHW shares trade at 17.6-times our 2023 EPS 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 target price of $95 (raised from $90) implies a multiple of about 21-times our 2023 EPS estimate.

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