Does Schwab’s Sell-Off Make It a Buy?

Regional banking mania has consumed the financial media for weeks.

But a story slipped through cracks.

J.P. Morgan noted a large block seller dumping shares of Charles Schwab (SCHW) on March 9.

SCHW shares tumbled almost 13% that day and continued to fall as much as 41% before they bottomed days later.

So financial pros started searching this ticker like their lives depended on it. The search volume exceeded anything Schwab garnered for any six-month period in the last year in our proprietary Trackstar database.

Now, with shares down nearly 30% from where they fell, is Schwab a buy?

Charles Schwab’s Business

Schwab offers an array of financial products and services, including banking, asset management, securities brokerage, and financial advising. 

You can find one of its nearly 400 branches across 48 states as well as in the U.K., Hong Kong, and Singapore.

Investor services comprise 75% of the company’s net revenues. Advisor services comprise the other 25%.

Like banks, Schwab invests excess cash, which is why some analysts are worried.

But of the $7.4 trillion at Schwab, $7.0 trillion is in segregated customer accounts and isn’t leveraged against long-term debt. 91% of its bank deposits are tied up in deposit sweeps from brokerage accounts. And the FDIC covers over 80% of Schwab’s bank deposits, far more than any bank. 

So a bank run isn’t likely and would have to go well beyond accounts at risk.

In fact, new core assets rose $16.5 billion from March 10 to 16.

Schwab bought TD Ameritrade in late 2020 for $22 billion and plans to finish the integration this year.

Financials

Source: Stock Analysis

Schwab’s revenues exploded in 2021 as the TD Ameritrade deal closed.

While revenue growth declined a bit in 2022, Schwab retains its customers with strong brand equity.

The CEO recently said the company could collect interest paid on its bonds, borrow over $300 billion from the Federal Home Loan Banks, and issue around $8 billion in CDs per month – actions that would cover every dollar of Schwab’s bank deposits and then some.

Valuation

Source: Seeking Alpha

Schwab isn’t terribly expensive, but it’s not cheap.

Its price-to-earnings ratio both looking backward and forward is about 15x, below its five-year average of 20x. But we wouldn’t call that a deal, especially with a price-to-cash-flow ratio of 48x.

And just because Schwab isn’t going under doesn’t mean it won’t face a profit squeeze on its investment portfolio. So its P/E ratio may rise in the coming months.

Growth

Source: Seeking Alpha

As we noted, growth slowed substantially in 2022 from the year before. Schwab’s growth outlook is in the middle among its peers, as is its earnings per share.

A lot of it hinges on the uncertainty surrounding depositors and the company’s investment portfolio. 

Profitability

Source: Seeking Alpha

Schwab’s profitability blows away its competitors’. It lags only in returns on equity and assets.

Our Opinion 6/10

We see better risk/reward opportunities with banks.

SCHW’s sell-off puts it below fair value. But possible earnings erosion makes it less attractive than banks down 30% or more.

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