Rising Rates: A Bonus for Schwab

11/11/2016 7:00 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Our latest value stock recommendation is one of the largest brokerage firms in the U.S., primarily serving retail clients, notes J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

Charles Schwab (SCHW) engages in wealth management, securities brokerage, banking, money management and financial advisory services.

Schwab provides custodial, trading and support services. It offers a range of products to address the investment and financial needs of individuals.

Its product offerings include brokerage, mutual funds, exchange-traded funds, advice solutions, banking and trust.

Charles Schwab depends on short-term interest rates, as nearly 40% of the company’s revenue came from net interest income in 2015 versus 37.5% in 2014. Earnings could rise noticeably after the Federal Reserve raises short-term interest rates.

Sales advanced 15% and EPS climbed 18% during the 12 months ended September 30, 2016. Growth accelerated in the recently reported third quarter with sales rising 20% and EPS surging 25%.

Sales will likely rise 6% and earnings per share will advance 19% to $1.40 in the 12 months ending September 30, 2017.

If interest rates rise at a faster pace during the next 12 months, sales and earnings could rise more than forecast.

The company’s 26.8 P/E ratio based on current EPS is reasonable. Earnings will likely increase 12.0% per year during the next five years or more.

Schwab beat analyst estimates for sales and earnings in the last several quarters. Analysts have raised their forecasts for the next four quarters.

I expect SCHW to climb 28% to reach my minimum sell price target of $39.88 within one to two years. I recommend purchase at $31.25 or below.

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By J. Royden Ward, Editor of Cabot Benjamin Graham Value Investor

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