Wedgewood Expects Charles Schwab (NYSE: SCHW) to “Produce Above-Market Growth”

Missouri-based investment firm Wedgewood Partners said in its Q4 investor letter – you can download a copy here – that Charles Schwab (NYSE: SCHW) could produce above-market growth, despite trading well below a marker multiple. The San Francisco, Calif.-based bank and brokerage firm performed poorly on the share market in 2018, with the share price tumbling over 19%. Let’s take a look at Wedgewood’s thoughts about Charles Schwab.

Charles Schwab reported +19% net revenue growth, combined with continued disciplined expense management, trailing 12-month overhead expenses as a percent of client assets fell to just 15.9 bps, which helped drive +55% growth in earnings per share in their most recent quarter.

The stock performed poorly, however, as global equity markets fell, investors assumed more conservative future growth in revenue from a reduced asset base. We think volatility related to Schwab’s core asset management revenues has been somewhat offset by the rapid expansion of its banking subsidiary.

Over the past several years, Schwab has done a good job executing low-risk strategies with its bank balance sheet, which have yielded outsized returns and should serve to offset some of the revenue volatility seen in prior periods of market turbulence. Though in the short-term, interest rates appear to have peaked, we think the Company still has some opportunity to expand its net interest margin.

Along with continued prudent expense management and excess capital to deploy, we expect Charles Schwab to produce above-market growth, despite trading well below a market multiple.

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Since the beginning of this year, Charles Schwab (NYSE: SCHW) has been performing well on the stock market. The company’s stock is up 7.65% year-to-date. Over the last 30-day period, SCHW has moved up 2.12%. For SCHW which is trading at $44.76, analysts polled by FactSet has a consensus target price is $52.18 and a consensus rating of ‘OVERWEIGHT’.

Now let’s look at what hedge funds are thinking about Charles Schwab. Our database shows that 53 funds held SCHW in their portfolios as of the end of the third quarter of 2018. That compares to 40 funds as of the end of the second quarter.