Is Schwab Okay?
The recent banking crisis has hammered financial stocks, but few more than Schwab, which is down 35% in three weeks.
In the wake of the Silicon Valley Bank (SVB) failure, Charles Schwab stock has suffered the fastest decline since 1987. While few clients of SilverPeak Wealth are direct investors in Schwab stock, all are Schwab clients, and many have expressed concerns about the health of the firm and whether their accounts are safe.
To cut straight to it… It is highly unlikely that Schwab will fail. The bond market estimates a 98.5% probability that Schwab will survive this banking crisis. Pretty high odds that are getting better as time passes because deposits are flowing into Schwab at a record pace. Presumably these deposits are fleeing the perceived risk of regional banks and seeking the safety and very attractive money market yields that Schwab offers.
Schwab by the Numbers
Today, Schwab trades at just 12.5X earnings and 6X cash-adjusted earnings, a bargain by even private equity standards. Schwab’s current stock price suggests an earnings growth rate of negative 5%, but analysts expect 16% long-term growth. Using Schwab’s own historical valuation, Schwab stock is currently 50% undervalued.
In the last few months, almost $400 billion has flowed from traditional bank accounts to higher-yielding money market funds. And most of Schwab’s fund flows have been into its own money market funds.
Schwab’s Liquidity Position
$71 billion in cash
$16 billion short-term credit revolver
$65 billion long-term credit revolver
$200 billion in bonds it can borrow against from the Fed
$352 billion in total liquidity
To put Schwab’s liquidity position in perspective, if 90% of people with a Schwab bank account wanted their money today, Schwab could give it to them. Schwab is simply in a very different position as SVB or Signature Bank.
Why Wall Street Hates Schwab
While Schwab seems to be fine from a liquidity and capital perspective, its earnings power will be lower than we previously thought, as it accesses higher-cost funding sources.
From Morningstar:
We’re reducing our fair value estimate for Charles Schwab to $70 per share from $87.
Our fair value estimate implies a price/2024 earnings multiple of about 20 times and a price/book multiple of about five times. $70 is currently our best assessment of the company’s long-term intrinsic value. That said, new data regarding how the financial sector and Charles Schwab were affected by the events surrounding Silicon Valley Bank could materially change our valuation in the following months. We made many adjustments to our prior model. The most impactful changes were a large increase in usage of high-cost, short-term debt in the near term and more client cash being held in lower revenue-yielding money market funds instead of more profitable banking deposits.” – Morningstar
Even Morningstar’s conservative model estimates Schwab stock is about 30% undervalued.