Analyst Note| Michael Wong, CFA, CPA |
We believe the market is undervaluing the medium- to long-term value creation from wide-moat Charles Schwab and narrow-moat TD Ameritrade’s merger synergies. There are clearly near-term headwinds to earnings from lower interest rates and uncertainty over the valuation of the stock market and client asset levels, which we project will lead to earnings being around 40% lower in 2021 compared with 2019 for Charles Schwab on an organic basis. However, we also believe that there are clear medium- to long-term tailwinds, primarily from the $3.5 billion to $4 billion of merger synergies. The expense synergies should be fully realized by the beginning of year four of the merger, while the revenue synergies will phase in over the next decade, providing a persistent earnings tailwind. After gaining more confidence in the valuation of their merger synergies, we recently increased our fair value estimate for Charles Schwab to $45.50 and for TD Ameritrade to $49. We assess shares of both firms are undervalued and trading at an attractive discount to many companies in the financial sector.