Schwab's stock has experienced a significant surge, increasing by nearly 12% over the past five days. This rise is attributed in part to falling inflation rates and speculation that the Federal Reserve is nearing the end of its rate hikes. The stock price surpassed $60 per share for the first time since September, closing at $63.16 on Friday. It is important to note, however, that despite this recent growth, the stock remains down approximately 25% for the year and is considerably lower than its 52-week high of $86.63.
Analysts have expressed optimism regarding Schwab's future, issuing positive reports that have contributed to the stock's recent success. Steven Chubak of Wolfe Research states in his November 26 report, "We see a choppy near-term setup, but unmatched long-term risk-reward." Chubak sets a price target of $70 for Schwab.
This year has presented various challenges for Schwab, the largest RIA custodian in the nation with approximately $8 trillion in assets. In March, the company faced a significant drop in its stock value amidst concerns regarding deposit outflows and significant unrealized losses in Schwab's portfolio. Schwab has also grappled with cash sorting, as customers choose to move uninvested cash from low-paying sweep accounts to higher-paying options like money-market funds. This shift impacts Schwab's profitability, as money-market funds generate smaller profits. Additionally, due to increased reliance on short-term borrowings, the company has experienced a surge in expenses which negatively affects earnings.
During this challenging period, Schwab has been focused on integrating TD Ameritrade, a former rival that it acquired three years ago. Efforts have been made to migrate advisors and clients from TD Ameritrade's platform to Schwab's. Unfortunately, some customers chose to leave before their planned migration dates, resulting in a decline in Schwab's net new assets.
To combat the financial challenges it has faced, Schwab recently implemented cost-cutting measures by laying off between 5% and 6% of its workforce. As of September, the company had nearly 36,000 full-time employees.
Despite the obstacles encountered this year, Schwab holds a strong position in the market. The recent surge in stock price, coupled with positive analyst reports, indicates a potentially promising future for the company.
Charles Schwab: A Promising Future
According to Wolfe’s Chubak, the worst may be behind Schwab. The integration of Ameritrade is mostly complete, and the majority of assets have already made the transition. This allows Schwab to capture incremental revenue and save on expenses.
Additionally, as the Fed nears the end of its rate hikes, Schwab will experience less cash-sorting pressure. This presents an opportunity for the company to pay down high-cost borrowings, leading to a significant boost in net interest income once organic growth stabilizes.
Schwab also has the potential to expand its lending business to wealth management clients. While estimates are conservative, with a lower lending penetration rate assumed, it is believed that Schwab can achieve $1.5 to $2 billion in incremental revenues.
Furthermore, Schwab can explore additional revenue opportunities by expanding alternative investments and providing more financial advice services to former TD Ameritrade clients. Currently, only 6% to 7% of TD Ameritrade’s underlying AUM is held in advice, compared to 18% to 19% at Schwab.
Senior research analyst Patrick Moley from Piper Sandler maintains a positive outlook on Schwab and rates the stock as overweight. While some short-term uncertainties remain, Moley believes that gradual net interest income growth and expense savings will converge to produce strong earnings power and an attractive valuation for long-term investors.
The future appears promising for Charles Schwab as it continues to thrive in the financial services industry.
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