Financial Services Stocks

Charles Schwab Corp Valuation – August 2016 $SCHW

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  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 or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – July 2016.  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 stock analysis showing a specific look at how Charles Schwab Corp (SCHW) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): The Charles Schwab Corporation is a savings and loan holding company. The Company, through its subsidiaries, engages in wealth management, securities brokerage, banking, money management and financial advisory services. The Company provides financial services to individuals and institutional clients through two segments: Investor Services and Advisor Services. The Investor Services segment provides retail brokerage and banking services, retirement plan services and other corporate brokerage services. The Advisor Services segment provides custodial, trading, and support services, as well as retirement business services. The Company offers a range of products to address individuals’ varying investment and financial needs. Its product offerings include brokerage, mutual funds, exchange-traded funds, advice solutions, banking and trust. Its subsidiaries include Charles Schwab & Co., Inc. (Schwab), Charles Schwab Bank (Schwab Bank) and Charles Schwab Investment Management, Inc. (CSIM).

SCHW Chart

SCHW data by YCharts

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Downloadable PDF version of this valuation:

ModernGraham Valuation of SCHW – August 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $39,743,346,963 Pass
2. Earnings Stability Positive EPS for 10 years prior Pass
3. Dividend Record Dividend Payments for 10 years prior Pass
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -14.05% Fail
5. Moderate PEmg Ratio PEmg < 20 29.67 Fail
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.68 Fail
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Pass
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

SCHW value chart August 2016

EPSmg $1.01
MG Growth Estimate 8.30%
MG Value $25.46
Opinion Overvalued
MG Grade C-
MG Value based on 3% Growth $14.71
MG Value based on 0% Growth $8.62
Market Implied Growth Rate 10.59%
Current Price $30.11
% of Intrinsic Value 118.26%

Charles Schwab Corp is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $0.65 in 2012 to an estimated $1.01 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 10.59% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Charles Schwab Corp revealed the company was trading above its Graham Number of $16.17. The company pays a dividend of $0.25 per share, for a yield of 0.8% Its PEmg (price over earnings per share – ModernGraham) was 29.67, which was above the industry average of 19.87.

Charles Schwab Corp receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

SCHW charts August 2016

Graham Number $16.17
PEmg 29.67
PB Ratio 2.68
Dividend Yield 0.83%
TTM Dividend $0.25
Number of Consecutive Years of Dividend Growth 1

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2016
Long-Term Debt & Capital Lease Obligation $2,876,000,000
Total Assets $198,052,000,000
Intangible Assets $1,390,000,000
Total Liabilities $183,062,000,000
Shares Outstanding (Diluted Average) 1,333,000,000

Earnings Per Share History

Next Fiscal Year Estimate $1.20
Dec2015 $1.03
Dec2014 $0.95
Dec2013 $0.78
Dec2012 $0.69
Dec2011 $0.70
Dec2010 $0.38
Dec2009 $0.68
Dec2008 $1.05
Dec2007 $1.97
Dec2006 $0.95
Dec2005 $0.55
Dec2004 $0.21
Dec2003 $0.35
Dec2002 $0.08
Dec2001 $0.14
Dec2000 $0.51
Dec1999 $0.49
Dec1998 $0.28
Dec1997 $0.22
Dec1996 $0.19

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $1.01
Dec2015 $0.89
Dec2014 $0.78
Dec2013 $0.68
Dec2012 $0.65
Dec2011 $0.74
Dec2010 $0.84
Dec2009 $1.06
Dec2008 $1.15
Dec2007 $1.07
Dec2006 $0.56
Dec2005 $0.33
Dec2004 $0.23
Dec2003 $0.27
Dec2002 $0.25
Dec2001 $0.33
Dec2000 $0.40

Recommended Reading:

Other ModernGraham posts about the company

27 Companies in the Spotlight This Week – 4/4/15
Charles Schwab Corporation Annual Valuation – 2015 $SCHW
17 Companies in the Spotlight This Week – 3/29/14
Charles Schwab Corp (SCHW) Annual Valuation – 2014

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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