Citi Downgrades Charles Schwab On Valuation Concerns

There may not be anything wrong with Charles Schwab Corp SCHW’s business, but one Wall Street analyst says there’s plenty wrong with the stock’s current share price.

The Analyst

Citi analyst William Katz downgraded Charles Schwab from Neutral to Sell and lowered his price target for the stock from $60 to $49.

The Thesis

According to Katz, there’re are four key reasons Citi has lost confidence in Schwab:

• 1. The firm is predicting EPS growth deceleration and rising execution risks through 2020.
• 2. Citi anticipates an unfavorable mix shift, leaving Schwab to depend almost entirely on net interest income to drive earnings growth.
• 3. Once earnings growth drivers start to fade, the stock may experience earnings multiple compression.
• 4. Rising costs, greater EPS variability and potential price cuts will pressure revenue.

Citi lowered its 2018 to 2020 EPS targets and is now in-line with consensus estimates. Katz said he doesn’t expect Schwab to hit the $3.00 EPS mark until 2020.

“As EPS normalize and the delta around earnings lift comes solely from spread-based revenues, we expect investors to rethink the valuation construct unfavorably,” Katz wrote in the downgrade note. He said his prediction that investors will begin to question the stock’s valuation may be early, but it will certainly come at some point.

Katz says he prefers brokerage peers LPL Financial Holdings Inc LPL and TD Ameritrade Holding Corp AMTD to Schwab stock.

Price Action

Charles Schwab stock traded down by 0.7 percent Wednesday, but remains up 31 percent in the past year.

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Image Credit: Djkeddie (Own work) [CC BY-SA 4.0], via Wikimedia Commons