SCHW Stock Study (8-29-24)

Posted by Mark on October 21, 2024 at 06:21 | Last modified: August 29, 2024 10:22

I recently did a stock study on Charles Schwab Corp. (SCHW) with a closing price of $63.98. The previous study is here.

M* writes:

     > Charles Schwab operates in brokerage, wealth management, banking,
     > and asset management. It runs a large network of brick-and-mortar
     > brokerage branch offices and 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. Schwab is among the largest firms
     > in the investment business, with over $8 trillion of client assets
     > at end of December 2023. Nearly all of its revenue is from [U.S.].

Over the last 10 years, this large-size company grows sales and EPS at annualized rates of 15.7% and 14.4%, respectively. Lines are mostly up, straight, and parallel except for an EPS dip in ’20 and sales/EPS dip in ’23. Five- and 10-year EPS R^2 are 0.12 and 0.82, respectively, and Value Line gives an Earnings Predictability score of 75.

Over the past decade, PTPM leads peer and industry averages while ranging from 33.9% in ’23 to 45.2% in ’19 and ’22 with a last-5-year mean of 40.5%. ROE leads peer and industry averages while increasing from 11.8% (’14) to 16.2% (’23) with a last-5-year mean of 17.1%. Debt-to-Capital is lower than peer and industry averages despite increasing from 13.9% (’14) to 59.1% (’23) with a last-5-year mean of 37.0%.

M* gives an Exemplary rating for Capital Allocation and awards a “Wide” Economic Moat. Value Line gives an A grade for Financial Strength. Last-5-year mean for Return on Average Assets is 0.89%.

With regard to sales growth:

• YF projects YOY 1.5% and 14.4% for ’24 and ’25, respectively (based on 15 analysts).
• Zacks projects YOY 1.7% and 14.7% for ’24 and ’25, respectively (8 analysts).
• Value Line projects 8.6% annualized growth from ’23-’28.
• CFRA projects 2.4% YOY and 10.7% per year for ’24 and ’23-’25, respectively.
• M* gives a 2-year ACE of 7.4% per year.

My 5.0% forecast is in the lower portion of the range.

With regard to EPS growth:

• MarketWatch projects 13.4% and 19.1% per year for ’23-’25 and ’23-’26, respectively (based on 21 analysts).
• Nasdaq.com projects 29.1% and 20.6% per year for ’24-’26 and ’24-’27 [10/10/1 analyst(s) for ’24/’26/’27].
• Seeking Alpha projects 4-year annualized growth of 23.0%.
• Argus projects 5-year annualized growth of 12.0%.
• YF projects YOY 2.9% contraction and 31.3% growth for ’24 and ’25 and 5-year annualized growth of 13.0% (18).
• Zacks projects YOY 2.6% contraction and 31.4% growth for ’24 and ’25 and 5-year annualized growth of 17.5% (10).
• Value Line projects 16.3% annualized growth from ’23-’28.
• CFRA projects growth of 3.2% YOY and 20.4% per year for ’24 and ’23-’25 along with a 3-year CAGR of 5.0%.
• M* projects long-term annualized growth of 16.9%.

My 11.0% per year forecast is below the 6-long-term-estimate range (mean 16.4%). I will use 2024 Q2 EPS of $2.41/share (annualized) as initial value rather than ’23 EPS of $2.54.

My Forecast High P/E is 21.0. Over the past decade, high P/E ranges from 19.3 in ’19 to 34.7 in ’15 with a last-5-year mean of 27.3 and a last-5-year-mean average P/E of 21.5. I am near bottom of the range (only ’19 is less).

My Forecast Low P/E is 15.0. Over the past decade, low P/E falls from 24.6 (’14) to 17.7 (’23) with a last-5-year mean of 15.8. I am forecasting toward bottom of the range [only ’19 (13.0) and ’20 (13.2) are less].

My Low Stock Price Forecast (LSPF) is $45.00. Default ($36.20) based on initial value given above seems unreasonably low at 43.4% (25.7%) less than the previous close (52-week low). My [arbitrary] forecast is 29.7% and 7.6% less, respectively.

Over the past decade, Payout Ratio (PR) ranges from 18.8% in ’18 to 39.4% in ’23 with a last-5-year mean of 29.6%. I am forecasting below the entire range at 18.0%.

These inputs land SCHW in the HOLD zone with a U/D ratio of 1.1. Total Annualized Return (TAR) is 6.8%.

PAR (using Forecast Average—not High—P/E) of 3.7% is less than I seek for any size company. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 150 studies (my study and 48 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 8.0%, 13.6%, 26.3, 15.7, and 25.5%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 23.0 is greater than MS (21.0) and mine (18.0).

MS high / low EPS are $4.68 / $2.41 versus my $4.06 / $2.41 (per share). My high EPS is less due to a lower growth rate. Value Line’s $5.40 is greater than both.

MS LSPF of $44.10 implies Forecast Low P/E of 18.3: greater than the above-stated 15.7. MS LSPF is 16.6% higher than the default $2.41/share * 15.7 = $37.84 resulting in more aggressive zoning. MS LSPF is 2.0% less than mine, however.

With regard to valuation, PEG is 1.2 and 2.2 per Zacks and my projected P/E, respectively: slightly overvalued on average. Relative Value [(current P/E) / 5-year-mean average P/E] is high at 1.2.

MOS is robust because my inputs (including quarterly initial value) are near or below respective analyst/historical ranges and MS averages. That is further supported by an MS TAR of 13.5%: 6.7%/year greater than mine.

Per U/D, SCHW is a BUY under $55. Given a forecast high price of $85.30, BI TAR criterion is met:

85.3 * (((1 – (12.94 – 0.9) / 100)) ^ 5) ~ $45/share.

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