by Tom Taulli | October 18, 2011 10:43 am
Charles Schwab’s (NYSE:SCHW) advertising likes to say: “Talk to Chuck.” Well, investors might want to talk to him about the company’s stock price. Since mid-February, the stock has plunged from $19.45 to $11.94.
And Schwab’s latest earnings report Monday had still more bad news for investors. Schwab did not miss its estimates by much. The company posted earnings of 18 cents per share, up from 10 cents per share in the same period a year ago.
However, the consensus estimate was for 19 cents. And in today’s jittery markets, investors don’t like being disappointed. SCHW shares fell by 6.35% on the news.
However, could this be an overreaction? Might Schwab shares be attractive at these levels? Here’s a look at the pros and cons of holding SCHW:
Diverse platform. While Charles Schwab is a leader in online brokerage services, the company also has been able to expand into other key areas. These include banking, trust services, investment research and financial planning. Charles Schwab also has an Institutional Services segment. Essentially, this provides the ability for financial advisors to setup their own practices.
Cleaning house. Charles Schwab has taken swift actions to deal with the legacy of the financial crisis. For example, the company has settled litigation over a mutual fund. At the same time, Charles Schwab has been disciplined with its cost structure.
Acquisitions. Schwab has had a good track record with its dealmaking. Some of its savvy transactions include the purchase of optionsXpress as well as Windward Investment Management, which is a top money management firm.
Interest rates. This has been a big problem for Schwab. In the latest quarter, SCHW waived $160 million in fees for its money market funds. If not, clients would have sustained a negative return!
Pricing. The brokerage business essentially is a commodity. And in light of tough competition — such as from E-Trade (NASDAQ:ETFC) and TD Ameritrade (NASDAQ:AMTD) — the industry is vulnerable to price wars. In fact, just last year, Schwab reduced its rates.
Exchange-traded funds (ETFs). Schwab has moved aggressively into this category. However, the fees for ETFs are much lower than alternative mutual funds.
Since its founding in the 1970s, Charles Schwab has been effective in riding the wave of baby boomers. Now, as this group heads into retirement, the company is making moves to benefit. To this end, there has been an expansion of its relationship with AARP. SCHW also has initiatives to expand its bond business.
So Schwab’s long-term outlook is attractive. The problem is that — according to the Federal Reserve’s policy — interest rates are likely to stay at or near 0% for the next couple years. Which means there’s little in the way of potential catalysts to get SCHW stock moving. Thus, the cons outweigh the pros on Schwab.
Tom Taulli runs the InvestorPlace blog “IPOPlaybook,” a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “All About Short Selling” and“All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a positioning any of the stocks named here.
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