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Stock Analyst Update

Schwab's Results Show Downward Pressure on Revenue

The wide-moat firm looks fairly valued.


Wide-moat-rated Charles Schwab (SCHW) reported fairly strong fourth-quarter and yearly results, but pressure in net interest income has already started. That said, 2020 earnings will be bolstered by Schwab’s pending acquisition of USAA’s brokerage business, as well as the recently announced merger with TD Ameritrade. The company reported fourth-quarter net income to common shareholders of $801 million, or $0.62 per diluted share, on $2.6 billion of net revenue during the period. Net revenue was down 2% year over year and down 4% sequentially, as trading revenue was cut  approximately in half from the firm enacting $0-commissions on multiple types of online trades, and Schwab’s net interest margin compressed as the Fed started cutting short-term interest rates. While the $801 million of quarterly net income was the lowest seen by the firm since the first quarter of 2018, we don’t anticipate making a material change to our $49 fair value estimate for Schwab (as much of this was already built into our valuation) and we assess shares to be fairly valued.

While fourth-quarter results were a step back for the firm, and the current macro environment with lower interest rates will make it tougher for the company to grow revenue organically in the near term, Schwab remains highly profitable and in a strong competitive position. The $3.5 billion of net income to common shareholders reported for 2019 was an annual record for the firm.

Schwab also ended the year with over $4 trillion of client assets, having accelerated the pace of client asset growth (as it took only around three years for the company to go from $3 trillion to $4 trillion in client assets while it took closer to four years for the company to go from $2 trillion to $3 trillion). Additionally, Schwab posted one of its best quarters for net new client assets during the fourth quarter, adding over $77 billion amidst the $0-commission announcement and increased advertising.

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Michael Wong does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.