Schwab Earnings: Cash Management Concerns Weigh on Stock Despite Robust Results

Key Morningstar Metrics for Charles Schwab

• : $114.00
• : ★★★★

• Morningstar Economic Moat Rating

  : Wide

• Morningstar Uncertainty Rating

  : Medium

What We Thought of Charles Schwab’s Earnings

Charles Schwab SCHW reported strong quarterly results, generating 16% sales growth, 38% growth in adjusted EPS, and attracting an outstanding $140 billion in net new client assets. Still, shares traded down by a mid-single-digit percentage during April 16 intraday trading on cash sorting fears.

Why it matters: Schwab is the low-cost operator in the retail brokerage and registered investment advisor custody space, and we believe that it will emerge as a long-term winner as a result, regardless of the ultimate vehicle of customer monetization. We’ve seen the firm reinvent its model twice already; first with asset management through its first-party funds and mutual fund marketplace, and second through Schwab Bank.

• Concerns seem to center on the planned launch of an artificial intelligence cash management tool by JPMorgan Chase, alluded to in Jamie Dimon’s annual letter to shareholders. The comments seem to portray that product as evolutionary, rather than revolutionary, with Dimon suggesting that high-net-worth clients are already adept at cash sorting and that competition for customer deposits is already intense.
• We don’t expect Schwab to see material pressure here. The rates paid on sweep deposits are very low—just 0.19% during the quarter—but also comprise less than 4% of customer assets. Customers seem to accept that low cash sweep rates are the ticket to admission for an otherwise free, robust ecosystem of services that Schwab provides. If the bank’s cost of funding were to tick up, those services would invariably need to be monetized in other ways.

The bottom line: As we digest results, we’ve raised our fair value estimate to $114 per share from $111, due to quarterly outperformance and a more constructive expected short-term interest rate environment.

Key stats: The firm’s $5.6 billion in revenue and $1.43 in adjusted EPS edged our respective $5.5 billion and $1.27 estimates, driven by better-than-expected 15% growth in asset management and 20% growth in trading revenue.