Schwab’s Long-Term Uptrend Expected to Endure Despite Disappointing Q4
Stronger earnings and revenue growth seen ahead; maintaining our fair value estimate on Schwab stock of $87.
Charles Schwab’s (SCHW) net revenue was sequentially flat in the fourth quarter, but we believe the company’s revenue and earnings will still experience a substantial uptrend over the near and long term. The company reported net income to common shareholders of $1.8 billion, or $0.97 per diluted share, on $5.5 billion of net revenue for the fourth quarter of 2022. Net revenue grew $789 million, or 17% from a year ago, but decreased $3 million from the previous quarter, while net income grew $372 million, or 26%, from the previous year, but decreased $63 million, or 3%, sequentially. The roughly flat sequential revenue and slight decrease in earnings was a bit disappointing given that net revenue grew at a high-single-digit percentage and net income grew a double-digit percentage in each of the previous two quarters. We continue to believe that wide-moat Charles Schwab will have stronger earnings growth in both the near and long term, so we are maintaining our $87 fair value estimate and assess shares are fairly valued to slightly undervalued.
The disappointing revenue was due to some flukes that we don’t think should persist. The company’s bank deposit account fee revenue declined $63 million, or 15%, sequentially. This was from a $13 billion outflow of BDA assets that seem to have been concentrated in floating rate assets, which had a net revenue rate of 1.85% compared with 0.89% for fixed-rate assets at the end of the third quarter. Net interest income also only sequentially grew $103 million compared with over $350 million in each of the previous two quarters. Movement in the net interest income categories was generally as we expected, except for short-term borrowings that increased to a cost of $142 million from $4 million the previous quarter.
Michael Wong does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.