Von Aldo

Schwab's Offering Too Richly Priced, Says Bernstein Analyst

This opinion --- negative --- from Brad Hintz, a senior analyst with Bernstein, is about as blunt an opinion as you'll get. It's about the Charles Schwab Corp.'s "surprise" (as Hintz puts it) equity offering to grow its retail bank.

Hintz wrote on 20 January, "As a former CorporateTreasurer poor financing decisions still anger me. This week Charles Schwab issued new equity at a PE of 22x to build the balance sheet of its commercial bank. Banks command long term market multiples of 14x. So essentially this company issued expensive common equity to invest in a business that doesn't justify the cost. Moreover the firm announced that it was transferring client cash from its money market funds to its bank to further fund the balance sheet expansion. This means that management is reducing its asset management fees to grow net interest -- essentially increasing capital intensity and lowering ROE.

I dont make this stuff up... "

Brad Hintz

Hintz notes in his report that "spread lending and mortgage origination simply are not as highly valued by the equity market -- they are intensive, involve assumptions of interest rate and credit risk and are highly cyclical. As a result the market values banks at significantly lower multiples than rapidly growing discount brokers. So, SCHW is effectively issuing new capital at 24X to invest in a business with a historic PE of 14X."

Then there is this web posting from Minyanville, which is a financial site worth bookmarking. Am not sure I totally understand the analysis, but the writer has a strong pedigree (25-plus years in the financial services business) and has a funny headline on his posting: "The National Bank of Charles Schwab."

Of course, Schwab has been doing great in the RIA (and hybrid space). According to the firm on Monday, Schwab "announced that it has helped more than 500 advisor teams convert to independence since the company began focusing on this segment in 2005. These teams manage $45.5 billion of the total $590 billion currently custodied at Schwab. In 2009, Schwab had a record year, supporting 172 new advisory teams as they either started or joined an independent firm, a 40 percent increase from 2008."

But does a bank cum custody/clearing operations desrve 22X times earnings? Hintz thinks not. He has lowered his 2010 earnings estimates and his price target to around $16 to $17 a share. (SCHW closed today at $18.63 a share.)

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