Value Expert Eyes Schwab

12/01/2016 8:00 am EST

Focus: STOCKS

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

My latest recommendation is an undervalued stock pick in the financial sector that should benefit from our new President, suggests J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

Banks, brokerages and insurance companies will benefit from rising interest rates, which have already begun to climb in anticipation of President-elect Trump’s campaign promises becoming enacted.

Financial company profits could also receive a boost if Mr. Trump reduces government restrictions on banks and financial institutions.

Charles Schwab (SCHW) is one of the largest brokerage firms in the U.S., primarily serving retail clients. The firm engages in wealth management, securities brokerage, banking, money management and financial advisory services.

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 (most likely beginning in December). I expect several rate increases in 2017, which will enhance earnings at Charles Schwab and other financial institutions.

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 EPS 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 soar past estimates.

 The company’s 26.8 P/E ratio is reasonable. Earnings will likely increase 12.0% per year during the next five years or more, making it an undervalued stock.

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

S&P rates Schwab 5 stars (best) for total return prospects. I expect the stock price to climb considerably during the next two years.

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

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