Good times are likely ahead for San Francisco, CA-based investment broker firm The Charles Schwab Corporation SCHW.
The Federal Reserve’s decision to finally hike benchmark interest rates indicates its confidence in the U.S. economy. The strength is likely to boost client confidence and draw investor attention, thereby driving increased business for Schwab. This, in turn, is expected to bolster the company’s top line, which creates a buying opportunity for long-term investors. Moreover, given its highly rate-sensitive business model, Schwab looks well-positioned to thrive in a rising rate environment.
What Makes Schwab a Hot Stock?
Rising Rates to Favor Revenue: Schwab’s all three revenue components, namely, Asset management and administration fees (constituting approximately 42% of net revenue), Net interest revenue (40%) and Trading revenue (12%) are anticipated to see a hefty rise in the near term on the back of a favorable interest rate environment.
We expect rising rates to directly boost Schwab’s net interest income. Further, while higher rates will likely lead to lower management fee-waivers, the recently released monthly activity report for November reflects notable improvement in net new assets as well as total client asset balances. Both these factors are predicted to bolster non-interest revenues at Schwab. Moreover, enhanced client confidence is expected to bring about a rebound in trading revenues going forward.
For 2015, the projected sales growth for Schwab stands at 3.9% against nil for the industry.
Earnings per Share: Schwab is expected to deliver strong earnings performance in the near term as indicated by the company’s projected EPS growth (F1/F0) of 4.6% against industry average of just 3.9%.
Superior Return on Equity: Schwab’s ROE of 12.02%, as compared with the industry average of 10.5%, reflects the company’s commendable position compared with its peers.
Stock Performance: Schwab’s year-to-date gain of 9.7% outpaces -1.7% and -0.1% for Dow Jones index and NASDAQ, respectively.
Favorable Zacks Rank & Earnings Estimate Revisions: Schwab currently carries a Zacks Rank #2 (Buy). Over the past 30 days, the company has seen 2 upward estimate revisions, while no estimate has been revised lower for 2015. For 2016, the stock is seeing a ratio of 4:1 in terms of up and down revisions.
Further, the Zacks Consensus Estimate for 2015 has remained stable at 99 cents per share in the past month; while that for 2016 has increased 1.5% to $1.37 per share during the same period.
Bottom Line
Diversified revenue streams remain a key strength at Schwab, and a rising rate environment is expected to support its organic prospects.
Moreover, the company is poised to benefit from its long-term strategy of strengthening retail branch network and increasing advisory capabilities to accelerate client acquisition in the long run.
Other Stocks to Consider
Other stocks in the investment broker space worth considering include E*TRADE Financial Corporation ETFC, Evercore Partners Inc. EVR and TD Ameritrade Holding Corporation AMTD. All the three stocks hold the same Zacks Rank as Schwab.
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