Charles Schwab Corp (SCHW), TD Ameritrade Holding Corp. (AMTD): Rising Interest Rates Will Lift This Stock

TD Ameritrade Holding Corp (NYSE:AMTD)Interest rates have nowhere to go but up, but the market is pricing securities as though rates will stay at historic lows forever. This presents investors with an opportunity to buy stocks getting hammered by the low interest rates at a bargain price.

When buying a company with the intention of holding onto it for many years, investors should always normalize the financials. In other words, a company earning a meager net interest margin today is going to earn a much higher net interest margin in a more normal interest rate environment. Therefore, investors should evaluate the company based on a higher net interest margin.

Charles Schwab Corp (NYSE:SCHW) is one such company that is getting clobbered by low interest rates. Its net interest income is only slightly higher today than it was in 2008, despite controlling significantly more assets today than it did just a few years ago. But net interest income should rise dramatically alongside interest rates.

Net interest income is only one component of Charles Schwab Corp (NYSE:SCHW)’s earnings. The company also earns revenue from transaction fees for its online brokerage and asset management fees. The company’s recent acquisition of optionsXpress positions it to generate more transaction fees.

However, both Charles Schwab Corp (NYSE:SCHW)’s brokerage business and asset management business do much better during less volatile markets. A market crash — or the general loss of confidence by retail investors — would be detrimental to all parts of Schwab’s business.

Competition

While Schwab has both a brokerage and an asset management business, its primary competitors only have one or the other.

For instance, TD Ameritrade Holding Corp. (NYSE:AMTD) is a plain vanilla online broker: it generates revenue from transaction fees and margin loans. It is doing relatively well despite the low interest rate environment, but will still benefit from higher interest rates due to higher margin rates. The company is also dependent on rising equity markets, as most retail investors are more active during a bull market than a bear market.

TD Ameritrade Holding Corp. (NYSE:AMTD) has primarily grown through acquisitions, which is generally not a recipe for long-term success. Management has been a little overzealous at times and has paid fair if not high prices for some past acquisitions.

In addition, the company’s client base is less sticky than Schwab’s; while Charles Schwab Corp (NYSE:SCHW) has a large percentage of long-term investors as brokerage clients, TD Ameritrade Holding Corp. (NYSE:AMTD) has a lot more short-term traders which tend to be more fickle. However, Schwab’s purchase of optionsXpress adds a number of short-term traders to its client base as well.

While TD Ameritrade Holding Corp. (NYSE:AMTD) competes for Schwab’s brokerage clients, T. Rowe Price Group, Inc. (NASDAQ:TROW) competes for its asset management clients. T. Rowe Price is one of the largest asset managers in the United States, with $575 billion under management.

TROW’s asset management clients are stickier than Charles Schwab Corp (NYSE:SCHW)’s; the majority of its accounts are retirement accounts, which tend to stay with one manager for many decades. In addition, TROW has more high-performing mutual funds than Schwab.

However, TROW’s business is extremely concentrated in the U.S. and focuses on equities and balanced equities/bonds portfolios. Not only does it miss out on opportunities to cross-sell a variety of strategies to its clients, but it is overly exposed to U.S. equity markets.

Bottom Line

Relative to most industries, there is not what I would call fierce competition in the brokerage/asset management business right now. If you invest in Schwab, you shouldn’t do it because you think it has a better competitive position. The thesis to bet on is that interest rates will rise soon, which will boost Charles Schwab Corp (NYSE:SCHW)’s bottom line. Bernanke has started to jaw-bone about higher rates, so anything could happen between now and 2015.

The article Rising Interest Rates Will Lift This Stock originally appeared on Fool.com and is written by Ted Cooper.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

10 Worst Airlines in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!