Schwab: Raising Our Fair Value Estimate on Stronger Asset Growth Assumptions

Key Morningstar Metrics for Charles Schwab

• Fair Value Estimate: $97.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

We’re transferring coverage of Charles Schwab SCHW, a diversified financial services provider with more than 43 million customer accounts across its retail brokerage, retirement, and banking segments, to a new analyst.

The bottom line: We’re raising our fair value estimate for Schwab to $97 per share from $88, driven by our expectations for long-term client asset growth of 10%-11% annually from 8%. We also maintain our wide economic moat rating, built around a durable cost advantage.

• Many of our prior conclusions remain intact, with through-the-cycle net interest margins just shy of 3%, roughly flat trading revenue over the coming decade, and maintenance of our Exemplary Capital Allocation Rating.
• The firm’s scale and increasingly broad scope of product offerings allow it to fractionalize investments across a $10.4 trillion client asset base that peers cannot match, while the brokerage provides cost-advantaged deposits to Charles Schwab Bank.

Big picture: Schwab’s competitive position grows stronger each year, with the firm boasting long-term organic net asset growth of 6% to 7% as clients bring more of their financial lives under the same roof.

• Two-thirds of Schwab’s net assets come from existing customers, and expansion into adjacent products like retirement accounts, alternative investments, a growing lending business, and wealth management extend its runway well into the future.
• The financial services industry continues to consolidate, with customers demanding better service for lower prices. This favors large, diversified providers like Schwab, which looks set to emerge as a long-term winner.

Long view: Market conditions bear monitoring, given Schwab’s sensitivity to short-term interest rates. Through the cycle, we believe that nearly 12% compound annual revenue growth is achievable (up from 10%), driven by unwinding cash sorting, repricing of the security portfolio, and market appreciation.