By
Alex Dumortier, CFA
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October 16, 2008
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Wednesday was a bloodletting for brokers, with the Securities Broker-Dealer Index losing 13%. Amid the wreckage, Charles Schwab (NYSE: SCHW ) was down a modest 5%. That should give you some clue about the quality of its third-quarter results, which were released Wednesday.
On a continuing basis (eliminating the effect of the sale of U.S. Trust to Bank of America (NYSE: BAC ) , net revenue fell just 3% year on year, with diluted earnings per share down 4%. In this environment, that's a win.
Operationally, the story looks even rosier, with clients adding assets in the quarter and trading more frequently -- the number of daily revenue trades rose 12% year on year. Volatility and heavy trading volume don't hurt companies that operate toll roads to the market!
Sure, Schwab had to eat some losses on debt securities of Lehman Brothers and Washington Mutual (NYSE: WM ) , but it had already estimated those losses at $75 million in August. No nasty surprises for investors, either: Actual losses came in at $73 million.
There is the small matter of price
Full-service brokers such as Morgan Stanley (NYSE: MS ) or Merrill Lynch (NYSE: MER ) can only look at those numbers with envy. However, although it's a fine business that's really proving its mettle in a very tough environment, Charles Schwab doesn't have me salivating right now. The reason? Price. At 20 times the low estimate for next year's earnings (16 times the consensus estimate), the stock doesn't set the cheap-o-meter ringing.
Schwab's stock has suffered approximately a 20% decline year to date -- less than its peers TD AMERITRADE (Nasdaq: AMTD ) and E*Trade (Nasdaq: ETFC ) and quite a bit less than the broader market. With a strife-torn market now offering some conspicuous bargains, it doesn't make sense to spend too much time looking at Chuck right now.
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