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Stock Analyst Update

Schwab's Winter Update Has Some Strategy Nuggets

We don’t plan on making a material change to our $51 fair value estimate for the wide-moat firm.


Wide-moat Charles Schwab (SCHW) had its winter business update that contained several nuggets on its near-term financials and long-term strategy. An issue that investors may have been worried about is any losses that could result from the dramatic price movements in some heavily shorted stocks over the past week or so. Retail brokerages mainly have loss exposures to large price movements when their customers buy stocks with margin loans or when clients sell derivative contracts. Charles Schwab’s management stated that losses weren’t material and made reference to the magnitude of losses the company experienced on volatility-related products from several years ago, which was only $15 million in the first quarter of 2018. Two updates on merger synergies with TD Ameritrade included that the company expects to realize 25% to 35% of the estimated $1.8 billion to $2 billion of expense synergies by the end of 2021 and that the company’s harmonized order routing revenue outlook is more positive than before the merger. We had previously estimated that harmonizing order routing revenue practices would have a negative $1 to $2 per share effect on the company. After the winter business update, we don’t plan on making a material change to our $51 fair value estimate for Charles Schwab.

On the strategic front, Charles Schwab talked again about its relationship with third-party asset managers and thematic investing. Charles Schwab has a prominent position with its clients and may be able to share in more of the economics of its asset manager partners by curating the investments available on the platform. We think this could take the form of a marketing or distribution fee. For thematic investing, which is related to direct indexing, Schwab mentioned that it will pursue asset-based pricing for this offering. The company’s Motif and fractional share trading capabilities have enabled this thematic offering.

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Michael Wong does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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