The stock market has enjoyed a great first half of the year with the S&P 500 up 15.9% year to date (YTD) through June 30 and the Nasdaq Composite up 32%. The first-half return for the Nasdaq is the best since 1983. Is this the start of a new bull market or a bear market rally? Time will tell, as we can only tell when a bull market started in retrospect.
But what is not in question is the fact that the overall market has bounced back in a big way, and many stocks have soared. If you think you missed the boat on getting some good stocks at a low price, you probably have, but there is at least one great stock you have not missed out on yet -- Charles Schwab (SCHW 0.13%).
Still a good value
Charles Schwab is the largest brokerage firm in the country with about $8 trillion in client assets under management (AUM) and more than 34 million accounts as of June 30. The financial services giant also has wealth management, financial advisory, banking, lending, credit cards, and other services.
Despite solid performance in the second quarter, the stock price is down about 18% year to date, trading at around $67 per share. Its valuation metrics, while rising since Q1, still indicate a stock that's reasonably valued, as the price-to-earnings (P/E) ratio of 19 is down from 25 at the end of 2022 and 23 on June 30, 2022.
Schwab's price drop is mainly due to concerns in Q1 after two major banks collapsed in March. Investors were concerned that it would be subject to deposit outflows and be forced to sell underwater bond portfolios, but that was not the case, as Schwab had plenty of liquidity and was able to navigate the turmoil.
Schwab's Q2 earnings were even stronger as it generated $1.3 billion in net income, down from $1.8 billion a year ago, but it beat expectations with $0.75 earnings per share (EPS), which was better than the consensus estimate of $0.71 EPS. Also, revenue was at $4.7 billion, down 9% year over year but ahead of estimates of $4.6 billion.
Image source: The Motley Fool.
As the chart above shows, interest income accounted for the bulk of revenue at $4.1 billion, up 51% compared to the same quarter a year ago, due to higher interest rates. But the company also had $1.8 billion in interest expenses, so net-interest revenue was down 10% year over year to $2.3 billion. Also, as the chart indicates, asset management was strong due to a rising stock market, as revenue climbed 11.5% to $1.2 billion in the quarter. But trading, banking, and other revenue sources were all down in the quarter.
Also, the firm brought in almost 1 million new brokerage accounts and brought in $52 billion in net new assets to get back over $8 trillion in AUM.
Growth ahead
Schwab has averaged 17% EPS growth over the past 10 years through June 30, and its stock price has returned 12% on an annualized basis over that time.
Because of its market share and strength, its stellar reputation and brand, with one of the highest net-promoter scores in financial services, and its variety of revenue streams, Schwab has been able to outperform in various market cycles. Last year, for example, it was up 0.10% in a year when the S&P 500 was down nearly 20%.
While it performs better than most in down markets, Schwab, like many financial stocks, is built to run in a bull market. When the economy is strong and markets are up, it will benefit from higher asset- and wealth-management fees, more trading revenue, and increased lending activity. Now, while the economy seems to have avoided the widely predicted recession this year, at least so far, some analysts say the economy could slow again late this year or early next year before a full recovery takes place.
Schwab should be in prime position to ride a bull market run when it does come, especially as it begins to integrate its acquisition of TD Ameritrade into its operations. To date, about 30% of TD Ameritrade clients have been transitioned over, and the company expects to have most of them over by the end of the year. That will help it expand its market share, enhance its scale, and generate additional earnings once fully integrated.
Schwab's stock price jumped about 12% after it posted earnings this week. While it is still a good value, it does seem as if the market is starting to recognize a good buy when it sees one.
