Charles Schwab Corporation
) established itself as one of the most popular online brokerage
firms by providing investors diversified securities brokerage,
banking and related financial services through its subsidiaries,
which manages a combined $1.7 trillion in client assets and
has 8.1 million active brokerage accounts and 728,000
banking accounts. However to move shares higher, "Chuck" needs
to focus on profit margins that have slipped in recent years. While
increased competition and a difficult macro environment are partly
to blame for its declining margins, the company's profit margins
have slipped below competitors in recent years. The
company competes with other online brokerage, banking and
financial services firms like E-Trade (
), Ameritrade (
) and Bank of America (
price estimate for Charles Schwab is $19.60
implies a nearly 30% premium to the market price.
Schwab's margins have been on the lower side of the
Schwab's operating margins were highest in 2008 at just over
42%. The global economic downturn dragged margins down to near 34%
in 2009 with continued unfavorable interest rate
scenario causing margins to decline further to about 22%.
Notably, Ameritrade managed margins of nearly 60% in
recent years while E-Trade too keep its margins above 40% during
the same period. You can see how margins trended for these two
competitors in the charts below.
So what does Schwab need to look out for?
The largest chunk of Schwab's expenses can be attributed to the
cost it incurs in compensating its employees. These expenses
accounted for more than half of the company's expenses last year
and has grown substantially year-on-year to reach more than $1.5
billion in 2010.
Advertising expenses have also grown exponentially in recent
times with the nationwide "Talk to Chuck" campaign being an
expensive affair. And these expenses are only expected to increase
in the years to come.
While the company has already started working on cost cutting
measures how effective it is in implementing them will only be
evident with time.
See our complete analysis for Charles Schwab