Moderating Schwab Estimates

Charles Schwab Corporation's (SCHW - Analyst Report) first-quarter diluted earnings from continuing operations of $0.26 per share were in-line with our estimate as well as the consensus. Though fundamentals remain strong and capital restructuring provides a positive signal, the valuation based on P/E and P/B currently looks very expensive.

Further, we suspect lower client activity resulting from a weakening economy and margin compression due to lower interest rates, during the coming quarters. Hence, our rating remains unchanged at Hold.

We also expect SCHW to grow its market share in the coming quarters as a result of ongoing problems with some of the discount brokers. SCHW remains focused on improving its margins and return on equity.

SCHW currently trades at 19.4 times the consensus forward estimate, a 35% premium to the peer group median. We think that SCHW deserves to trade at a premium over its peers, based on its excellent asset growth, stable revenue stream, sound credit rating, and steadily expanding margins.

We are moderating our FY08 and FY09 earnings estimates to $1.09 per share and $1.29 per share respectively. Our $23.00 price target equates to 21.1 times our EPS estimate for FY08. We view the $0.20 per share annual dividend as secure, implying a 6.5% expected total return over the period.

Read the full analyst report on SCHW