There’s a theory out there that shares of Charles Schwab (SCHW) should get a boost from rising interest rates. That theory is wrong, according to a new Raymond James report.
Associated Press Discount brokers had a great 2013, in large part because of the perceived boost they would get from rising interest rates and rising stock prices. Charles Schwab returned 83%, E*Trade Financial (ETFC) surged 119%, TD Ameritrade (AMTD) rose 88%, and LPL Financial (LPLA) finished the year up 69%.
Raymond James analysts Patrick O’Shaughnessy and Cory Dlugozima explain higher interest rates by not give Charles Schwab the boost many are expecting:
While Schwab does have significant upside to rising interest rates, we believe dramatically improved earnings through higher interest rates remains years away given Schwab’s relative insensitivity to the long end of the curve. Trading at 24x our 2015 EPS estimate of $1.10, we continue to believe Schwab’s shares are overvalued given the firm’s increasingly capital-intensive, bank-like profile.
One of the big problems: Short-term interest rates could stay low for even longer. That hits Schwab where it hurts because Schwab’s money-market fee waivers cost the firm $700 million in revenue in 2013.
E*Trade, which O’Shaughnessy and Dlugozima rate Market Perform, looks better, but only just. They explain:
E*TRADE’s earnings outlook improved significantly over the course of 2013, highlighted by long-awaited regulatory approval to dividend capital from the bank to the parent, completion of a $110 million cost-reduction program, and a stabilizing net interest spread. That said, with E*TRADE’s shares trading at ~17x our 2015 EPS estimate of $1.15, we believe these positive factors are reflected in the current valuation.
Shares of Charles Schwab have ticked up 0.1% to $25.85 at 11:33 a.m., while E*Trade has jumped 1.5% to $20.10, TD Ameritrade has gained 0.5% to $30.59 and LPL Financial has risen 0.6% to $47.35.
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