Lowering Charles Schwab Stock Fair Value Estimate to $70

Charles Schwab Stock at a Glance

• Current Morningstar Fair Value Estimate: $70
• Charles Schwab Stock Star Rating: 4 Stars
• Economic Moat Rating: Wide
• Moat Trend Rating: Stable

Charles Schwab Stock Update

We’re reducing our fair value estimate for Charles Schwab SCHW to $70 per share from $87. Our fair value estimate implies a price/2024 earnings multiple of about 20 times and price/book multiple of about 5 times. $70 is currently our best assessment of the company’s long-term intrinsic value.

That said, new data regarding how the financial sector and Charles Schwab were affected by the events surrounding Silicon Valley Bank could materially change our valuation in the following months. We made many adjustments to our prior model with the most impactful changes being a large increase in usage of high-cost, short-term debt in the near term and more client cash being held in lower revenue-yielding money market funds instead of more profitable banking deposits.

Schwab Has Enough Cash and Capital to Weather the Storm

We assess that wide-moat Charles Schwab has enough access to cash and capital to weather the storm in the financial sector that was unleashed after the collapse of Silicon Valley Bank. The company has access to the Federal Reserve’s Bank Term Funding Program that can provide the firm upward of $200 billion of cash to deal with potential deposit withdrawals from clients. It also had about $40 billion of cash on its balance sheet at the end of 2022, over $50 million of cash inflows projected in 2023 according to our calculations, and other sources of liquidity.

On the regulatory capital front, Charles Schwab had a very healthy common equity Tier 1 capital ratio of 21.9% and a 7.2% Tier 1 leverage ratio at the end of 2022. It’s true that the company’s capital ratios would look worse if they included unrealized losses on securities holdings.

However, Schwab shouldn’t ever have to change those unrealized losses into realized losses by selling the securities, because it has so much access to cash. The unrealized losses are also related to the high interest rate environment (they’re not losses from bad credit quality), and most of the unrealized losses should reduce to $0 when the fixed income securities mature.