Is It Safe? No Discounts on Schwab Shares

For a company that specializes in cheap trading, Charles Schwab shares are expensive.
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For a company that specializes in cheap trades,

Charles Schwab

(SCHW) - Get Report

shares are expensive.

Schwab's

stock has climbed 13% this year, while the Russell 1000 Financial Services Index remains flat. The shares, which have rebounded to $18 after hitting $11.36 in March, are trading at 23 times the amount it's expected to earn this year, compared with 17 times for its rivals.

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Schwab beat analysts' first-quarter earnings estimates, lifting investors' hopes even as its net income fell 29%. The San Francisco-based company has been trimming fees to maintain its lead in a fiercely competitive industry. Meeting shareholders' profit expectations for the next 18 months won't be easy.

Schwab shares are trading at 18 times next year's projected net income, compared with 15 times for its peers. Its price-to-book value stands at 4.7, topping the 2.5 industry average.

TD Ameritrade Holding

(AMDT)

,

optionsXpress Holdings

(OXPS)

,

E*Trade Financial

(ETFC) - Get Report

and

TradeStation Group

(TRAD)

offer more attractive prices.

Rational explanations exist for Schwab's hefty valuation. Its earnings per share are forecast to grow 28% next year, 10 percentage points higher than those of its average competitor. Only optionsXpress, whose earnings are projected to expand 29% in 2010, is expected to outgrow Schwab next year.

Schwab has been trying to lure new clients by cutting mutual fund fees to offset shrinking client assets, but so have its peers. Many investors view online trading as a commodity, and choose the broker that charges the lowest commissions.

Schwab's basic online rate is $12.95 per trade. Active traders with accounts bigger than $1 million pay $8.95. Other firms have been dangling fees as low as $7 a trade. TradeStation charges a penny a share, or $5 for 500 shares, for some transactions.

Barron's

most recent ranking of the top 25 online brokers suggests rivals might be gaining traction.

Thinkorswim Group

(SWIM)

, which is being acquired by TD Ameritrade, led the list. Schwab, at No. 13, lagged behind its biggest competitors, including E*Trade and TD Ameritrade.

Schwab's ability to remain profitable during the economic slide and stock market plunge have earned it a grade of C-plus from TheStreet.com Ratings, making it a stock to "hold." Among its competitors, only TD Ameritrade is rated "buy" with a grade of B.As companies fight for market share, it might become harder for Schwab to keep its lead.

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

Richard Widows is a senior financial analyst for TheStreet.com Ratings. Prior to joining TheStreet.com, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.