Mr. Schwab's Lesson for the Credit Crisis

Today’s lesson from Chuck: The term “financial services” covers a lot of different businesses; investors who lump all companies in the industry together will inevitably skip over investing opportunities. Motley Fool Stock Advisor pick Charles Schwab (NYSE: SCHW  ) proved it this morning with a solid earnings report, posting a 9% year-over-year increase in net revenue and a 22% increase in income from continuing operations (adjusted for the sale of U.S. Trust to Bank of America (NYSE: BAC  ) ).

Schwab’s growth in net new client assets has decreased significantly, but we are talking growth here: Assets continue to walk through the door. Schwab clients were even net buyers of equity mutual funds throughout the quarter.

(A bear market has a number of effects on brokerage profits, not all of which are negative. On the one hand, investors tend to withdraw from the stock market; on the other, stock price volatility promotes trading activity. It’ll be interesting to see the same metrics for the current quarter, now that we have officially entered bear territory.)

One other note: Schwab started offering mortgage loans in 2003, and it has done so conservatively. Where traditional lenders such as JPMorgan Chase (NYSE: JPM  ) , Citigroup (NYSE: C  ) or even U.S. Bancorp (NYSE: USB  ) may be feeling “once bitten, twice shy” in a distressed market, Schwab can be opportunistic. Outstanding mortgage and home equity loans were up 76% year over year to $4.1 billion, with delinquencies a low 0.33% of outstanding balances. That’s the sort of enterprising spirit I like to see.

All in all, this quarter is more proof that the man with his name on the door has done a terrific job turning this firm around since he returned as CEO in 2004. What of the stock? The following table suggests to me that Schwab is more attractive than its two closest competitors for a risk-averse investor (suggests only – the burden of proof is a lot higher).


FY 2009 P/E Ratio

Market Value/ Total Client Assets

Charles Schwab



E*Trade Financial (Nasdaq: ETFC  )



TD Ameritrade (Nasdaq: AMTD  )



Sources: Yahoo! Finance, company reports.

As a turnaround, E*Trade is probably a higher-risk proposition. And, although I wouldn’t call Schwab outrageously cheap right now, it is a high-quality franchise which deserves a premium earnings multiple over TD Ameritrade. So let’s repeat Chuck’s lesson for the day: An online brokerage is a much lower-risk business than an investment bank -- investors could do a lot worse than taking a look at Schwab.

Related Wall Street Foolishness:

Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article, but he is a Charles Schwab customer. U.S. Bancorp, JPMorgan Chase, and Bank of America are Motley Fool Income Investor picks. Charles Schwab is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days.

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