Shares of financial services company Charles Schwab (NYSE: SCHW) tanked in morning trading on Monday even as top-rated Citi analyst Christopher Allen upgraded the stock to a Buy from a Hold. The analyst has a price target of $75 on the stock implying an upside potential of 57.9% at current levels.
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The analyst believes that with the stock losing more than 35% of its value over the past five trading sessions, this pullback “creates a compelling entry point.”
Allen perceives near-term headwinds for Schwab’s revenues and earnings as funding costs rise and higher client cash sorting activity occurs but believes these headwinds are already factored in its current stock price.
Cash sorting occurs when clients move their cash to money market funds with higher payments from low-yield bank deposits. The analyst added that this is occurring at a higher magnitude than prior cycles but “we do not see a material risk to deposits leaving SCHW given the composition of its deposit base and customer protections.”
Allen pointed out that SCHW is currently trading at 15 times his EPS estimate for 2023, indicating a more than 30% discount from historical averages.
Considering the collapse of the SVB, Charles Schwab moved swiftly to reassure investors on Monday that it was performing “exceptionally well” and it was expecting Q1 revenues to grow 10% year-over-year with adjusted pre-tax profit margin in the range of 45% to 47%.
In the month of February, core net new assets totaled $41.7 billion, the bank’s second-largest February ever. At the end of February, total client assets declined 4% year-over-year to $7.38 trillion and down 1% month-over-month.
The company added that it has “access to significant liquidity, including an estimated $100 billion of cash flow from cash on hand, portfolio-related cash flows, and net new assets we anticipate realizing over the next twelve months.”
Analysts remain cautiously optimistic about SCHW stock with a Moderate Buy consensus rating based on 12 Buys, three Holds and one Sell.
