Goldman Sachs analyst says stock in Charles Schwab & Co. is a “ conviction ” buy, after another year Goldman moved its wealth model to Schwab’s.

The New York investment bank researcher said Wall Street does not understand how valuable the discount broker’s franchise will be as interest rates begin to normalize.

Note from Brooke: If I were to attribute car brands to financial brands, I’d be safe in saying that Goldman Sachs is a Mercedes – two premium brands built to last. Charles Schwab & Co. could roughly be compared to a Toyota – known to serve a mass market but meeting quality standards. And, yes, I would say Mercedes envies Toyota (more than the other way around) for the larger size of its addressable market and its ability to technically push some consumers out of its league. Goldman, it seems, sees Schwab that way as well, depending on all the ways he’s doing his wealth management business. It’s probably a coincidence that Goldman’s research department granted Schwab a “ conviction ” buy (beats a half-hearted buy) while the Wall Street firm is busy mimicking its business model, but maybe not be in a broader sense. Of course, what we all want is to be the next Tesla in finance. Perhaps Fidelity is one of the main contenders for this crown. He is investing like crazy in himself and taking “ crazy ” risks like his push into bitcoin. I’m going to have to dwell on this car brand analogy until Fidelity’s track record in the moon initiatives confirms my belief. But we’ll have a few articles in the next few days that will shed some light on how Abby Johnson acts with urgency Elon Musk’s style.

If imitation is the sincerest form of flattery, then Charles Schwab Corp. was already blushing as Goldman Sachs continued to take aggressive action – like introducing RIA custody and strengthening management of wealthy mass heritage over the past year – to look more like Chuck.

Yet now the famous Wall Street investment bank is putting some love in writing, adding Schwab shares to its much-vaunted “conviction” list – prompting investors to buy shares in Westlake company, at the time. Texas. See: Goldman Sachs is banking on David Solomon to be a catalyst for more RIA-ifcation, jerk off with millennials, diversify the business … and keep bankers happy.

Will Nance: The market will continue to look towards the high end of historical valuation ranges.

Schwab shares are rightly expected to trade 14% higher to $ 77 – an increase that would add $ 17 billion to the brokerage giant’s market cap, according to Goldman analyst Will Nance.

It hit a 52-week low at $ 31.63 last June.

“[Schwab] the stock has lagged behind improving fundamentals for the quarter to date, ”he wrote in a note to investors.

Schwab (SCHW) Market cap stands at $ 126.8 billion, as of April 7, but its shares slipped in yesterday’s session, down $ 1.45, or 2.1% from its recent high April 5 from $ 68.75.

“The market will continue to look higher end of historical valuation ranges as short-term rates remain at zero, leading to an important option,” adds Nance.

Nance raised his Schwab price target from $ 67 to $ 77. He also calls for Q1 adjusted EPS of 78 cents, slightly ahead of analysts’ consensus estimate of 74 cents.

White shoe for work boots

Goldman, long regarded as the gold standard of investment banking and proprietary trading on Wall Street, begins trading his white shoes for work boots, chasing the same market that Schwab started: managing wealthy mass.

This too acquired a RIA depository, Folio, which is one of the bread and butter companies in Schwab, and is now recruiting there. See: Goldman Sachs lifts two superstar RIA recruiters from Schwab and Pershing, helping out with big push in RIA space, aiming for Guard launch in early 2021

It is also a client of Schwab RIA through its acquisition of United Capital. Online exchanges could be the next.

Historically, the wealth management division of Goldman Sachs consisted of a team of high-end stock brokers who generously utilized their own proprietary Goldman Sachs Asset Management mutual funds.

The formula still works, but leaves around 90% of the investor market to Schwab and Fidelity to pursue relatively unopposed by other giants.

Bet on it

It’s not that Goldman Sachs stock analysts and its master business model strategists compare their ratings.

In fact, Nance documents his newfound belief about Schwab’s actions on his company’s broader analysis of how the Federal Reserve will act – and how that will affect Schwab’s cash flow.

It plans two federal rate hikes by the end of 2024, the first as early as 2022. The move will support the net interest margins that will give Schwab the ability to pass higher rates to consumers, thereby attracting assets and allowing the broker to take their fair share of the larger spread.

“We believe the market will continue to look higher end of historical valuation ranges as short-term rates stay at zero (leading to an important option) and the stock has fallen behind. improving the fundamentals of the quarter to date, “he wrote in his note. .

If so, Nance knows more about the Federal Open Market Committee (FOMC) than he does himself. The regulator said in March it would likely keep rates close to zero until 2023 to stimulate domestic spending and keep unemployment low.

The central bank is also continuing an asset buying program, buying at least $ 120 billion in bonds per month, which injects money into the economy.

Its current target interest rate range is between zero and 25 basis points (bps).

The Fed’s projections for 2022 and 2023 GDP show gains of 3.3% and 2.2% respectively. Longer-term GDP growth is expected to be around 2.3%

Fed machinations

The committee, however, showed signs of changing its mind.

The number of FOMC members wanting a rate hike in 2022 rose to four to one in December – eight to eight – in part because of rising inflation.

The rate of inflation fluctuated between 2.13% in 2017 and 1.8% in 2019. The rate was 1.4% last year and currently stands at around 1.7% in the first two months of this year.

Lael Brainard
FOMC board member Lael Brainard voted against Schwab’s merger with TD Ameritrade.

Former investment banker Jerome Powell has served as president of the FOMC since his appointment in 2018.

Obama’s FOMC nominee Lael Brainard was the sole opponent when the Federal Reserve gave Schwab the green light to buy TD Ameritrade last September. See: Despite the Fed’s dissenting vote, Charles Schwab Corp. on Tuesday cleared the merger with TD, and ‘Schwabitrade’ looks less scary than expected.

The FOMC released the minutes of its March 16-17 meeting today (April 7) and said it would not budge on its current approach to interest rates until Jobs and inflation is actually increasing. The Fed has said it relies more on “results-based guidance” than forecasts as a policy driver.

Previously, the committee adjusted its policy in anticipation of inflation. It also lowered its year-end inflation forecast to 2.2%, from 2.4% earlier this year, according to a recent statement.

The FOMC minutes also said the committee was forecasting a target rate of 50bp by the end of 2023. All members agreed to keep the current interest rate of zero to 25bp for now.

Rising margins

Schwab’s net interest margin will likely stabilize at 140 basis points, its lowest – a decline of nearly 100 basis points from the fourth quarter of 2019. The brokerage’s net interest income is at again on the rise, albeit due to the growing scale of the company. recent Winter business update revealed.

Jerome Powell
Jerome Powell is president of the increasingly belligerent interest rate FOMC.

“Strong growth in interest-bearing assets through client asset inflows and allocation decisions, as well as our acquisition of TD Ameritrade, helped limit the consecutive year-over-year decline in revenue. net interest at just 6% to $ 6.1 billion, ”Schwab chief financial officer Peter Crawford said in Schwab’s latest quarterly report.

In the past year alone, Schwab increased its interest-bearing assets to $ 514 billion, a 85% increase including a 12% increase at the October close of its purchase of TD Ameritrade.

Its net interest income grew $ 214 million, or 13%, in the fourth quarter of 2020, according to the company statements.

The federal yield curve, which demonstrates the relationship between yields and maturities of fixed income treasury bills, also climbed on two, five and ten year bonds, month over month, according to the Fed. March deposits.

A steady rise in the yield curve will increase Schwab’s net interest margins on cash balances held by brokers and banks. Net interest income represented 52% of the company’s $ 11.7 billion total revenue last year, according to a statement.

A pleasant surprise

The recent surge in trading volume at the majority of national retail brokerage firms has also benefited Schwab’s financial results. The brokerage’s daily average trades exceeded 9 million in February, up from 1.9 million in 2019.

Schwab Westlake Campus
Charles Schwab Corp. officially moved its corporate headquarters to Westlake, Texas on January 1.

“Volumes of transactions in shares [stand at] truly breathtaking heights – well beyond the pre-pandemic peak, “writes Crawford, in a Note.

Schwab’s outlook for a further surge in the share price – the company is already trading at a 29% premium to the start of the year – is an expected positive earnings surprise of up to 0, Nance says $ 04 out of $ 0.74 per share, according to Nance. .

The Goldman analyst also raised his overall profit estimates for the company through 2024.

Of the 21 top analysts tracked by Bloomberg who follow the company, 12 rated Schwab as a buy; only one suggests to sell, according to The street.

Analysts project an average price target of $ 69, according to Bloomberg.

Schwab will likely announce its results for the first quarter of 2021, April 15. The brokerage house manages $ 6.8 trillion in client assets, of which $ 3.02 trillion is managed by RIAs.

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