Charles Schwab Corp. (SCHW) has gained market share by challenging industry pricing standards with many low- or no-cost offerings, including its popular proprietary ETFs, observes Stephen Biggar of Argus Research, a leading independent research firm on Wall Street.
The firm has optimized the spread earned on client cash sweep balances through bulk transfers from money market funds to its Schwab Bank.
We expect higher short-term interest rates to drive continued growth in net interest revenue. Based on our expectations for 20% EPS growth in 2019, we view the shares as undervalued at less than 15-times our 2019 EPS estimate.
Schwab has the largest number of active brokerage accounts in the industry, and we believe has managed competition well in recent years as per-trade commissions have fallen rapidly. It offers considerable value for its current commission pricing, including research, idea generation and other services, which are unlikely to be part of JPM's free offering.
We note that trading accounted for only 7% of Schwab's total revenues in the first nine months of 2018, with asset management and net interest revenues by far the larger contributors, with per-trade commissions declining for many years.
We expect Schwab to post above-peer-average growth thanks to its innovative products and continued market share gains.
Overall, Schwab has grown core net assets by more than $100 billion in each of the last six years, with a well above-average $233 billion in 2017. It also continues to take cost-conscious clients from other financial services providers.
Given the substantial overcapacity in the financial services industry, management expects market share gains to be a primary growth driver and believes that the ability to build relationships and offer quality advice will be key determinants of success.
We rate the financial strength of Schwab as "High", the highest rating on our five-point scale. Charles R. Schwab has been chairman of the company since its inception in 1986. Mr. Schwab owns 141 million shares of stock valued at about $7.5 billion. Our 12-month target price is $69 per share.
