Schwab Posts Better-Than-Expected Client Metrics for July

Aug 13, 2010 11:34 AM, By David A. Geracioti

This morning the Charles Schwab Corporation released an interesting but brief press release. In short, Chuck has a reason to be smiling. The announcement said:
• Net new assets entering the company by new and existing clients in July 2010 totaled $6.2 billion.
• Total client assets were $1.421 trillion as of month-end July, up 11% from July 2009 and up 4% from June 2010.
• Client daily average trades were 365.3 thousand in July 2010, down 1% from July 2009 and flat to June 2010.

The SMART report can be viewed with its accompanying 12-month data here.

FBR Capital Markets analysts Matt Snowling and Bill Jackson issued a research note soon after the announcement, reiterating an outperform rating on Schwab. They put a price target of $20 on the stock (SCHW), or 21.5 times their 2011 EPS estimate of $0.93 per share. Schwab stock sold off this morning by nearly 1 percent to around $14.64 a share.

The FBR analysts are bullish medium to long term; Brad Hintz, a well-regarded analyst at Bernstein, in a note last month after second-quarter results, calls the stock a market performer, saying he didn’t see a catalyst to drive the stock to higher multiples on the horizon.

Here is what the FBR analysts said this morning:
“FBR takeaways. Total client assets increased 4% sequentially and
11% year over year to $1.421 trillion, as net inflows returned, at
$6.2 billion, following two months of outflows driven by a mutual
fund clearing client. Market-related gains totaled $53.7 billion
or 3.9% of beginning client assets. For the third consecutive
quarter, Schwab clients were net sellers of equity funds (-$644
million), favoring fixed-income funds (+$2.3 billion). The
reduction in risk appetite exhibited by Schwab clients is not
surprising given the increase in market volatility and the
pullback in the equity markets.

* “Value add. Organic growth returned during the month, and core
earnings power continues to grow, as active brokerage and banking
accounts are up 4% and 31%, respectively, year over year. In
addition, the stability in total client trades was better than
expected, helping alleviate some pressure on trading revenue.

* “Earnings. We are leaving our 3Q10, 2010, and 2011 EPS estimates
unchanged at $0.17, $0.53, and $0.93, respectively.

* “Valuation. Our $20 price target equates to 21.5x our 2011 EPS
estimate and 13.9x our normalized EPS forecast. We view these
valuations as appropriate given Schwab's historical average
forward P/E of 21x, as well as peers trading at 9x to 11x
"normalized" EPS. Given the uncertain timing of normalized EPS
occurring, we apply a conservative 17x multiple to our normalized
EPS estimate and discount that back over two years to arrive at
our $20 price target.”

Hintz summed up Schwab’s outlook this way in a report on July 19, just after Schwab reported Q2 results: “Bottom line: Schwab posted a solid result through challenging market conditions, driven by disciplined expense control and revenue growth. Given the solid operating result and recent pullback in the stock, the stock traded up in the day. But with the S&P down -4% YTD [1], DARTs down -4% YTD and with nearly a 0% chance of the Fed increasing rates by year end, it will be difficult for the firm to grow revenues in 2010. And with plans to increase expenses 4%-6% in 2010, management has few levers to pull that will help EPS. The stock is trading at ~19.2x next-twelve-month EPS, below its long-term average of 21.9x against the backdrop of a weak operating environment heading into 2011. We lower our 2010 EPS estimate from $0.56 to $0.53. We lower our 2011 EPS estimate from $1.08 to $0.91. We continue to rate the stock Market-Perform.”

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