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When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider The Charles Schwab Corporation (NYSE:SCHW) as an attractive investment with its 13.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Charles Schwab hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
How Does Charles Schwab's P/E Ratio Compare To Its Industry Peers?
It's plausible that Charles Schwab's low P/E ratio could be a result of tendencies within its own industry. You'll notice in the figure below that P/E ratios in the Capital Markets industry are significantly higher than the market. So unfortunately this doesn't provide much to explain the company's ratio at all right now. In the context of the Capital Markets industry's current setting, most of its constituents' P/E's would be expected to be raised up greatly. However, what is happening on the company's own income statement is the most important factor to its P/E.
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Does Growth Match The Low P/E?
In order to justify its P/E ratio, Charles Schwab would need to produce sluggish growth that's trailing the market.
If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Although pleasingly EPS has lifted 83% in aggregate from three years ago, notwithstanding the last 12 months. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 6.5% per year over the next three years. Meanwhile, the broader market is forecast to expand by 9.3% per annum, which paints a poor picture.
In light of this, it's understandable that Charles Schwab's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Bottom Line On Charles Schwab's P/E
The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Charles Schwab maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Charles Schwab with six simple checks.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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