Is The Charles Schwab Corporation (NYSE:SCHW) Worth $51.04 Based On Intrinsic Value?
SCHW operates in the capital markets sector, which has characteristics that make it unique to other industries. Understanding these differences is crucial when it comes to putting a value on the financial stock. For example, capital market businesses are required to hold more capital to reduce the risk to shareholders. Looking at line items like book values, with the return and cost of equity, is fitting for evaluating SCHW’s intrinsic value. Today I will show you how to value SCHW in a reasonably accurate and simple method. See our latest analysis for Charles Schwab
What Model Should You Use?
Financial firms differ to other sector firms primarily because of the kind of regulation they face and their asset composition. United States’s financial regulatory environment is relatively strict. In addition, capital markets usually do not have large portions of tangible assets on their books. As traditional valuation models put weight on inputs such as capex and depreciation, which is less meaningful for finacial firms, the Excess Return model places importance on forecasting stable earnings and book values.
How Does It Work?
The key assumption for this model is that equity value is how much the firm can earn, over and above its cost of equity, given the level of equity it has in the company at the moment. The returns in excess of cost of equity is called excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (20.25% – 10.11%) * $15.63 = $1.58
Excess Return Per Share is used to calculate the terminal value of SCHW, which is how much the business is expected to continue to generate over the upcoming years, in perpetuity. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= $1.58 / (10.11% – 2.47%) = $20.72
Combining these components gives us SCHW’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $15.63 + $20.72 = $36.35
Relative to today’s price of $51.04, SCHW is , at this time, trading above what it’s actually worth. Therefore, there’s no benefit to buying SCHW today. Valuation is only one part of your investment analysis for whether to buy or sell SCHW. Fundamental factors are key to determining if SCHW fits with the rest of your portfolio holdings.
Next Steps:
For capital markets, there are three key aspects you should look at:
Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.
Future earnings: What does the market think of SCHW going forward? Our analyst growth expectation chart helps visualize SCHW’s growth potential over the upcoming years.
Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether SCHW is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on SCHW here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
