SCHW Fundamental Research Investment Analysis, The Charles Schwab Corp.

close nav

The Razor's Edge

2-Year Price History

Recent Price
(10/17/2008 4:00 PM)
$21.00
52-Week Price
$10.75 - $28.75
Market Capitalization
$24.2 Billion
Dividend Yield
1.10%
Most Recent Dividend
$1.20

SCHW Stock Evaluation

The rating for SCHW has not changed this week as we reiterate our Greatly Undervalued rating on SCHW. While there has been a price increase over the last week of 3.96% for this stock, it has not been enough of a change to substantially influence our rating negatively. We have seen an increase in earnings expectations which is always a positive in our analysis. So, the better anticipated earnings make the price appreciation justified and thus allows us to reiterate our Greatly Undervalued rating.

SCHW Revenue

For a long time, value investors have used the current share price relative to sales per share levels as an important valuation tool. We utilize a historical weighted average methodology that treats recent years more importantly in the calculation. When looking at SCHW through this framework, we can see that our weighted average historical high and low Price to Sales per share ratios over the last 10 years are 5.34x and 2.77x respectively.

Utilizing this range we can see that SCHW’s current Price to Sales per share ratio of 4.22x is somewhat above its historical average. As such, the current Price to Sales ratio suggests a neutral share price forecast. In order for us to become more positive about SCHW we would need to see a drop in the Price to Sales ratio of 4% given current sales per share levels in order to return to its historical weighted average.

SCHW Cash Earnings

As a value investment framework, Ockham Research is similar to a private equity firm in terms of our valuation methods. We are always on the lookout for value in the form of sales and cash numbers. In the case of SCHW, Ockham views their current Cash Earnings as significantly below its historical average multiple of Cash Earnings. Looking at the last 10 years we can get a good understanding of what investors have grown to expect from SCHW. For example, SCHW's Cash Earnings ratio per share has fluctuated between 19.13 and 32.99 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where SCHW is with respect to prior business periods.

So with SCHW's current price (latest close of $21.00) and most recent level of Cash Earnings reported, we see significant opportunity from a value perspective. At its current price level, SCHW is 66% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn't exist in a vacuum. So if the market doesn't recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings verse their historical norms. So be patient with SCHW.

SCHW Dividends

While it is not necessary to pay an attractive dividend or a dividend at all, to receive a positive rating from Ockham, we view dividends as an additionally helpful measure in determining the future potential of any company.

In SCHW’s case, the estimated annual dividend is $0.24 resulting in a current dividend yield of 1.14%. Similar to our review of Sales and Cash Earnings per share, we evaluate dividend yields from SCHW against the historic high and low levels over the past 10 years. The highest dividend yield from SCHW over this period was 6.92% while the lowest dividend yield was 0.09% While it is quite common for a growth stock to pay no dividend at all, but for a mature company such as SCHW that has a history of paying dividends it is disappointing to see their dividend yield drop so significantly. At this time, the current dividend yield is 67.48% below the median yield.

Peer Comparison

:

The Charles Schwab Corp. Industry Grouping

(10/17/2008)
Company Ticker Market Cap (Ml) Latest
Price
Price/Cash Earnings Price/Sales 5-Yr. Rev.
Growth Rate
5-Yr.
Avg. ROE.
Current 10-Yr. Range* Current 10-Yr. Range*
Peer Company Averages (not incuding SCHW) 9.53 5.05 » 58.27 2.28 1.55 » 20.51 18.43% 17.59%
*10 year range does not include current year values
Merrill Lynch & Company, Inc. MER $27.8 Billion $18.15 1.14 1.34 » 127.21 0.53 0.65 » 9.10 17.28% 13.04%
American Express Company AXP $27.0 Billion $23.33 6.57 6.16 » 50.90 0.78 1.95 » 12.17 5.80% 29.72%
The Charles Schwab Corp. SCHW $24.2 Billion $21.00 8.97 5.02 » 310.93 4.22 4.33 » 26.70 4.63% 24.48%
Nomura Holdings, Inc., ADS NMR $23.6 Billion $12.37 22.09 8.54 » 40.40 2.47 1.27 » 11.66 17.51% 7.47%
Morgan Stanley MS $20.4 Billion $19.24 3.33 1.45 » 25.28 0.57 1.19 » 7.10 21.36% 16.06%
CME Group, Inc. CME $19.9 Billion $365.20 14.53 7.78 » 47.55 7.03 2.69 » 62.52 30.21% 21.66%
Current
Rating on:
SCHW

Ockham's Rating

The rating for The Charles Schwab Corporation (SCHW) is unchanged this week as we reaffirm our Greatly Undervalued rating. We have maintained this position since it was upgraded to this rating in the report written on 10/11/2008. SCHW had been rated Undervalued before 10/11/2008. While this is a reaffirmation of our Greatly Undervalued rating, we would like to highlight some of the important changes in price and earnings expectations for SCHW.

Starting with the basics, the price of SCHW rose from $20.20 as of 10/11/2008 to a price of $21.00 as of 10/18/2008. This increase does reduce the attractiveness of SCHW, but an increase of 3.96% is not substantial enough to warrant a downgrade at this time.

It is encouraging that earnings guidance has been revised upwards by $1.02 per share. However, because we currently rate the stock Greatly Undervalued, there is no way for us to upgrade the rating on this stock. We already see this as an undervalued security and the improved fundamentals only serve to support that case.

Key Fundamentals

SCHW - The Charles Schwab Corporation Fundamentals
Price (10/17/2008 4:00 PM) $21.00
Volume (10/17/2008 4:00 PM) 11.6 Million
10 Day Average Volume 14.5 Million
13 Week Price Range $10.75 - $28.75
52 Week Price Range $10.75 - $28.75
LTM Revenue $5.5 Billion
 
Shares Outstanding (12/2007) 1.2 Billion
Market Capitalization $24.2 Billion
Shares Held By Institutions 777.4 Million
Insitutional Holders 710
% Shares Held By Institutions 67.50%
Earnings Per Share (EPS) $1.97
P/E Ratio 19.80
Book Value Per Share $3.38
 
Gross Margin n/a%
Quarterly Dividend 0.24
Dividend Yield 1.10%
Beta 1.27
Fiscal Year Ends December

About The Charles Schwab Corp.

The Charles Schwab Corporation is considered to operate in the Financial sector. They specifically operate in the Investmnt Brokerage-National business segment contained within the Financial Services industry.

A savings and loan holding company is engaged in securities brokerage, banking, and related financial services.