Finally, if the fed finds the U.S. economy too weak to hike short rates this year or next, Schwab is likely to fall short of consensus 2016 EPS estimates. Asset growth, adjusted for market appreciation, has been lackluster at 5% and operating margins have started to decline. Schwab, to launch its ‘robo-advisor’ program, is spending aggressively on marketing, while cannibalizing and alienating existing accounts and advisors with a much lower margin product. It is estimated that 80% of assets into this program thus far have come from existing accounts.
Meanwhile, Schwab’s cutthroat tactics to aggressively grab assets and manage them for no fee may alienate its advisor base. Also, Schwab will inevitably have to squeeze vendors, Walmart style, for a increasingly larger cut of the spread on ETF fees and trading. Schwab’s bank is already waiving money market management fees to entice investors. It may also be wrong in betting on ‘Drone investing’ as the wave of the future for tech savvy Millennials. They may want to beat the market rather than be the market, as has been the plight of every preceding generation.Schwab’s current high valuation leaves it extremely vulnerable to an earnings shortfall and a market correction. Other comparable financials sector firms trade at much lower PE ratios, like Goldman Sacks (GS) at 12, LPL Financial (LPLA) at 18, JP Morgan (JPM) at 11. With market share gains becoming much harder to attain, and while competition is becoming much tougher in the high growth ETF arena from other discount heavy weights such as Fidelity and Vanguard, Schwab has a rough road to hoe. Of course, Schwab has a good brand and a mountain of assets, but Schwab has no other real choice than look within to improve ROA. At 24 bps Schwab is clearly at levels far below full-service wealth managers such as JP Morgan (JPM) at 50 bps. With EPS expected at $1.25 next year, we could see Schwab trading at the lower end of its historical P/E range of 15-18x as the market diminishes its growth expectations. Look for Schwab to trade down to $23 in 2016. Source: Forbes, June 3, 2015 Disclosure: Maltbie’s firm is long Noah Holdings and short Charles Schwab.