Coverage Launch: $20 Trefis Price Estimate for Charles Schwab

Charles Schwab Corporation (NYSE:SCHW) is an online brokerage, banking and financial services firm. It competes with firms like E-Trade (NASDAQ:ETFC), Ameritrade (NYSE:AMTD), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC).

We have launched coverage on Charles Schwab with a $19.89 price estimate for the company’s stock, in line with market price.

Launch of Coverage on Charles Schwab; $19.89 Price Estimate

We have broken down our analysis of Charles Schwab into four divisions:

1. Interest on Deposits, Loans & Securities
2. Mutual Fund & Other Investment Fees
3. Trading Commissions
4. Maintenance Fees & Others

Charles Schwab’s at a Glance

The Charles Schwab Corporation engages in securities brokerage, banking, and related financial services through its subsidiaries. Its biggest, and oldest, subsidiary is Charles Schwab & Co., Inc. which is a securities broker-dealer with a pan-U.S. presence through more than 300 branches. The brokerage arm had more than 8 million client brokerage accounts at the end of 2010.

Other subsidiaries include the Charles Schwab bank, which has 690,000 banking accounts, and Charles Schwab Investment Management, the investment advisor for Schwab’s proprietary mutual funds (Schwab Funds). Through these subsidiaries, Charles Schwab manages a combined $1.57 trillion in client assets.

Charles Schwab’s Advantage in the Online Brokerage Industry

Online Brokerage firms compete on various aspects including commissions & fees, types of investment products offered, research & advice for investors, and customer service. Charles Schwab has created a niche in the highly competitive industry by providing one of the best research services to its customers. The company’s focus on providing financial advice to individual investors while maintaining a moderate commission fee has attracted customers and helped it achieve a 5% annual growth in the number of active brokerage accounts.

We believe that the strength of Charles Schwab’s investment research arm allows this segment to contribute the most value to the company. Interest on Deposits, Loans & Securities represents almost 50% of Charles Schwab’s stock value, by our estimates. As net interest return is dependent on the investments undertaken by the firm, the value of this return is highly dependent on the efforts of the research arm.

The combined value of the deposits, loans and securities at Charles Schwab has grown significantly over the past few years. Most notably, this value increased by almost 25% from $43.8 billion to $53.5 during the global economic recession of 2009. This can be attributed to the large number of customers switching to Charles Schwab from its competitors during that period.

Moreover, the company also maintained positive returns on its investments through the economic crisis, and also reported a net profit for the financial year 2009 – which also points to Charles Schwab’s distinct advantage through its focus on research and financial advice for investors.

See the complete $19.89 Trefis price estimate for Charles Schwab’s stock.