Chuck Needs to Control Expenses to See $20+ Valuation

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Charles Schwab Corporation ( SCHW ) 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 ( ETFC ), Ameritrade ( AMTD ), Wells Fargo ( WFC ) and Bank of America ( BAC ).

Our 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 industry..

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



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AMTD , BAC , ETFC , SCHW , WFC

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