Charles Schwab Corp (NYSE:SCHW) is one of the largest U.S. brokerage firms, with almost 9 million client accounts and assets of almost $2 trillion. Schwab offers retail brokerage services, services to investment advisors, as well as retirement plan services and more. While new account growth is weaker than it has been in the past, client trading activity is on the rise (as happens during most bull markets), making this sector a potential beneficiary if the U.S. E TRADE Financial Corporation (NASDAQ:ETFC)conomic recovery continues. With a good growth rate, but high valuation, is Schwab a buy, or would investors be better off looking at a competing brokerage, such as TD Ameritrade Holding Corp. (NYSE:AMTD) or E TRADE Financial Corporation (NASDAQ:ETFC)?
How does Schwab make its money?
Charles Schwab Corp (NYSE:SCHW) separates its business into three distinct segments. The Investor Services segment makes up 39% of the company’s revenue and includes the company’s retail brokerage and banking businesses, and offers its clients the opportunity to buy and sell securities in their personal accounts. The brokerage also offers clients a range of investment planning tools and professional advice from Charles Schwab Corp (NYSE:SCHW)’s portfolio consultants.
Schwab’s Advisor Services segment accounts for 40% of the company’s revenue and offers investment advisors a platform to conduct their business, including managing their clients’ accounts. Finally, the Other Institutional Services segment that makes up the remaining 21% of the company’s revenue includes a variety of services, such as retirement plans, services to investment plan administrators, mutual fund clearing services, and more.
Growth and valuation: too expensive?
With profits highly dependent on interest income, Charles Schwab Corp (NYSE:SCHW) is likely to have slow revenue growth until the Fed raises rates. While this is unlikely to happen anytime in the near future, it does provide a very interesting growth opportunity once it does happen, most likely in a year or two. Additionally, there has been a recent trend starting of investors moving money into equities from cash and bonds, which should provide Charles Schwab Corp (NYSE:SCHW) (and its competitors) with increased income from trading commissions.
Schwab is expected to post earnings of $0.73 per share for the current fiscal year, rising to $0.86 and $1.03 in 2014 and 2015. This means that shares trade for 28 times this year’s earnings, which sounds reasonable for a company with 18% annual earnings growth projected over the next two years. Before we go jumping in, let’s take a quick look at two other major retail brokerages that Charles Schwab Corp (NYSE:SCHW) competes with.