In the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid financial company in which to invest, because they require specific achievements over the historical period. Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn’t be considered when evaluating the company’s prospects, but doing so would involve speculation. We don’t know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before. By continuing to require the same standards for the historical period, Intelligent Investors are able to widdle down banks to only those with the best financial position, and then they are able to determine an intrinsic value to get a sense of whether the company is a good investment. In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Charles Schwab Corp fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): The Charles Schwab Corporation (CSC) is a savings and loan holding company. The Company engages, through its subsidiaries, in securities brokerage, banking, and related financial services. The Company provides financial services to individuals and institutional clients through two segments: Investor Services and Institutional Services. The Investor Services segment provides retail brokerage and banking services to individual investors. The Institutional Services segment provides custodial, trading and support services to independent investment advisors (IAs). Its business subsidiaries include Charles Schwab & Co., Inc. (Schwab), Charles Schwab Bank and Charles Schwab Investment Management, Inc. (CSIM), which is the investment advisor for Schwab’s mutual funds. In November 2011, the Company acquired Compliance11, Inc. In September 2012, GAIN Capital Holdings Inc. acquired Open E Cry, LLC. In December 2012, the Company acquired ThomasPartners, Inc.
Defensive Investor – must pass all 6 of the following tests: Score = 4/6
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 2/3
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$9.86|
|Value Based on 0% Growth||$5.78|
|Market Implied Growth Rate||16.65%|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Charles Schwab Corp does not qualify for either the Defensive Investor or the Enterprising Investor due to insufficient earnings growth over the ten year historical period and the five year historical period, respectively. The company needs to show further growth in the coming years in order to be more attractive as an investment opportunity. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham’s valuation of Wells Fargo & Co. (WFC) and ModernGraham’s valuation of JP Morgan Chase (JPM). From a valuation perspective, the company does not fare well at all, again as a result of the lack of earnings growth. EPSmg (normalized earnings) have dropped from $0.82 in 2009 to $0.68 in 2013, a demonstrated performance that does not support the market’s implied estimate of 16.65% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls well below a margin of safety relative to the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Charles Schwab Corp (SCHW)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
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Disclaimer: The author did not hold a position in Charles Schwab Corp (SCHW) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.