What do Schwab and Bernanke have in Common?
September 11, 2007 9:48 pm
First a Question: What do Mr. Bernanke and Mr. Schwab have in common?
Answer: Both need to clean up a major mess left by their predecessors.
With that in mind, here is something seen earlier today that you do not see too often: “SCHW: $19.15, +0.24, +1.3%; moved up more than 3% to $19.50, making Schwab the biggest gainer among the S&P financial stocks.” Marketwatch had focussed attention on the financial sector/group ahead of the recent volatility into the Bernanke bailout/recession decision. It makes sense that with all of the added volatility we have seen in these markets that there would be a few names that will float to the top. Schwab (SCHW) is one that makes a good deal of investment sense if you think about it.
Sidebar: Whether or not Bernanke rescues the financial market is yet to be seen. What we do know is that he has his hands full. (I was interviewed on Marketwatch/Dow Jones Video today on this exact subject in fact – audio and video are out of synch so close your eyes when you listen). If he decides to act like his predecessor, then it is a sure thing that he will throw gobs of money at the situation in the form of rate cuts and anything else he can get his hands on. This will only exacerbate the problem and leave more of a mess for us to clean up later. If he acts more responsibly, then he will be more careful and restrained. The latter is more his style.
Back to Schwab: Even if you know nothing about the fundamentals for the company or did not have the chance to look at the charts, reports or even the price; the fact remains that you could extrapolate that excessive volatility benefits online brokers. Schwab has a double benefit; 1) they are considered an online broker and 2) one that has managed to steer clear of the mortgage mess. This is in sharp contrast to competitor E-Trade which is knee deep in the mortgage business. Schwab kept their investment philosophy clean, especially since “Chuck” took back the reigns.
In a several posts (going back 2 months), I wrote about the addition of Schwab stock to portfolios and went so far as to “push the idea” as it was clear even as far back as July that there would be a nice move for SCHW as volatility increased within the domestic equity markets. (See Survive Sinkhole and Podcast 22 )
Schwab has a mammoth profit margin of 28.5%, and ROE of 29% and a 5 year growth rate approaching 19%. Not bad, especially when you look at the competition. It is no wonder that E-Trade and Ameritrade are in serious merger discussions.
Ratios are well in-line with a PEG of 1.0 though the current P/E is showing a premium over its competitors. This is primarily because the competitors are so beaten down due their foray into mortgage market investments and investor’s current aversion to any company involved.
Where does it go from here? Schwab (the man) has always had a clear vision for Schwab (the company). His “back to basics” approach after he took back the daily control of the company has shown a leaner and more focussed business. The Post-Pottruck era for Schwab has shown Chuck’s ability to revitalize the brand and keep a sharp pencil on the bottom line. This is in sharp contrast to the poor acquisition record and sector-domination-at-any-cost attitude that was becoming a part of the corporate culture before he came back to head up a general brooming of those in management that had forgotten their roots.
He too has his hands full. Cleaning up the mess included breaking off companies that were not profitable and regaining customer trust. He is doing a great job and the company is on a great path towards continued profitability. We have a 12-month price target of $25 as Schwab should continue to benefit from the fallout over brokers with sub-prime exposure.
Note: Horowitz & Company clients hold LONG positions of SCHW.