SCHW Stock Study (7-5-23)

Posted by Mark on July 28, 2023 at 06:16 | Last modified: July 5, 2023 10:49

I recently did a stock study on Charles Schwab Corp. (SCHW) with a closing price of $57.72.

M* writes:

     > Charles Schwab operates in brokerage, wealth management, banking,
     > and asset-management businesses. The company runs a large network
     > of brick-and-mortar brokerage branch offices, a well-established
     > online investing website, and has mobile trading capabilities. It
     > also operates a bank and a proprietary asset management business
     > and offers services to independent investment advisors. The
     > company is among the largest firms in the investment business,
     > with over $7 trillion of client assets at the end of December
     > 2022. Nearly all of its revenue is from the United States.

Over the past decade, this large-size company has grown sales and EPS at annualized rates of 15.8% and 18.0%, respectively. Lines are mostly up, straight, and parallel except for an EPS dip in ’20. PTPM leads peer and industry averages while trending higher from 31.4% in ’13 to 45.2% in ’22 with a last-5-year mean of 42.8%.

Over the past decade, ROE mostly leads peer and industry averages while increasing from 11.0% in ’13 to 24.3% in ’22 with a last-5-year mean of 17.5%. Debt-to-Capital is lower than peer and industry averages despite trending higher from 15.5% in ’13 to 50.9% in ’22 with a last-5-year mean of 30.1%.

Return on Average Assets has increased from 0.7% in ’13 to 1.1% in ’22 with a last-5-year mean of 1.0%.

M* gives an Exemplary rating for Capital Allocation and Value Line gives a B++ rating for Financial Strength.

With regard to sales growth:

• CNN Business projects 6.3% YOY contraction and 3.1% growth per year for ’23 and ’22-’24 (based on 18 analysts).
• YF projects YOY 7.1% contraction and 13.4% growth for ’23 and ’24, respectively (18 analysts).
• Zacks projects YOY 6.6% contraction and 14.0% growth for ’23 and ’24, respectively (8).
• Value Line projects 5.4% annualized growth from ’22-’27.
• CFRA projects 3.1% YOY contraction and 5.2% growth per year for ’23 and ’22-’24, respectively.
• M* gives a 2-year ACE of 1.3% per year along with a 5-year annualized projection of 6.0% (analyst note).

I am forecasting near the bottom of the range at 3.0%.

With regard to EPS growth:

• CNN Business projects 18.2% YOY contraction and 1.8% growth per year for ’23 and ’22-’24, respectively (based on 18 analysts), along with 5-year annualized growth of 8.8%.
• MarketWatch projects annualized growth of 1.8% and 9.3% for ’22-’24 and ’22-’25, respectively (23 analysts).
• Nasdaq.com projects annualized growth of 27.3% and 18.3% for ’23-’25 and ’23-’26 [9, 5, and 1 analyst(s)].
• Seeking Alpha projects 4-year annualized growth of 12.1%.
• YF projects YOY 17.9% contraction and 27.8% growth for ’23 and ’24, respectively (21), along with 5-year annualized growth of 8.6%.
• Zacks projects YOY 16.4% contraction and 28.2% growth for ’23 and ’24, respectively (9), along with 5-year annualized growth of 5.4%.
• Value Line projects 8.2% annualized growth from ’22-’27.
• CFRA projects 4.1% YOY contraction and 8.1% growth per year for ’23 and ’22-’24 along with a 3-year CAGR of 8.0%.
• M* projects long-term annualized growth of 9.0%.

The mean of six long-term estimates is 8.7% per year. I am forecasting below the range at 5.0%. I will use ’22 EPS of $3.50 as the initial value rather than ’23 Q1 EPS of $3.66/share (annualized).

My Forecast High P/E is 20.0. Over the past decade, high P/E has trended down from 33.4 in ’13 to 27.5 in ’22 with a last-5-year mean of 25.4. The last-5-year-mean average P/E is 20.4. I am forecasting near the bottom of the range [19.3 in ’19].

My Forecast Low P/E is 12.0. Over the past decade, low P/E has ranged from 13.0 in ’19 to to 24.7 in ’15 with a last-5-year mean of 15.3. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) is the default $42.00 based on $3.50/share initial value. This is 27.2% less than the previous closing price and 6.7% less than the 52-week low.

Over the past decade, Payout Ratio has ranged from 18.8% in ’18 to 34.0% in ’20 with a last-5-year mean of 25.5%. I am forecasting below the entire range at 18.0%.

These inputs land SCHW in the HOLD zone with a U/D ratio of 2.0. Total Annualized Return (TAR) is 10.0%.

PAR (using Forecast Average—not High—P/E) of 5.5% is less than I seek for a large-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 398 studies over the past 90 days (my study along with 142 other outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 6.9%, 8.4%, 23.4, 14.9, and 24.8% respectively. I am lower across the board. Value Line projects an average annual P/E of 22.0, which is higher than MS (19.2) and mine (16.0).

MS high/low EPS is $5.39/$3.49 versus my $4.47/$3.50 (per share). My high EPS is lower due to a lower forecast growth rate.

MS LSPF of $44.40 implies a Forecast Low P/E of 12.7 in contrast to the above-stated 14.9. This is 14.6% lower (more conservative zoning) than the default value of $3.49/share * 14.9 = $52.00. MS LSPF remains 5.7% greater than mine.

MOS seems robust in the current study.

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are two valuation metrics I have recently begun to monitor. Zacks reports PEG of 3.3 (1.5 is generally regarded as an upper limit) while Relative Value (M* data) is 0.75. The former (latter) suggests the stock to be overvalued (undervalued).

I would look to re-evaluate SCHW under $53/share.