Is Charles Schwab (SCHW) Overvalued Despite Its Buy Rating from Analysts?

Charles Schwab may be overvalued with strong growth indicators, but the 15 analysts following the company give it an average rating of buy. The analysts have set target prices ranging from $53.0 to $110.0 per share, for an average of $74.99. At today's price of $50.98, Charles Schwab is trading -32.02% away from its average target price, suggesting there is an analyst consensus of strong upside potential.

The Charles Schwab Corporation, together with its subsidiaries, operates as a savings and loan holding company that provides wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. Based in Westlake, TX, the large-cap Finance company has 35,300 full time employees. Charles Schwab has offered a 1.7% dividend yield over the last 12 months.

Charles Schwab has a trailing twelve month P/E ratio of 14.6, compared to an average of 14.34 for the Finance sector. Based on its EPS guidance of 4.74, the company has a forward P/E ratio of 10.8. Based on the average compound growth rate of Charles Schwab's historical and projected earnings per share, which is 15.4%, the company's PEG ratio is 0.94. This suggests that its shares are undervalued.

In contrast, Charles Schwab is likely overvalued compared to its book value, since its P/B ratio of 3.5 is higher than the sector average of 1.57. The company's shares are currently trading 69.2% above their Graham number, implying that they are overvalued in terms of earnings and book value.

Why would analysts be giving such an overvalued stock a good rating? It's possible that analysts are looking beyond common valuation metrics and taking into account the company's responsible use of debt to operate its business. Furthermore, Charles Schwab has wide margins as you can see in the financial summary below.

2019-12-31 2020-12-31 2021-12-31 2022-12-31
Revenue (MM) $10,721 $11,691 $18,520 $20,762
Revenue Growth n/a 9.05% 58.41% 12.11%
Net Margins 34.55% 28.22% 31.61% 34.6%
Net Margins Growth n/a -18.32% 12.01% 9.46%
Earnings Per Share $2.67 $2.12 $2.83 $3.5
EPS Growth n/a -20.6% 33.49% 23.67%
Diluted Shares (MM) 1,320 1,435 1,897 1,778
Free Cash Flow (MM) $8,617 $6,221 $1,202 $1,086
FCF Growth n/a -27.81% -80.68% -9.65%
Capital Expenditures (MM) -$708 -$631 -$916 -$971
LT Debt to Equity 0.39 0.28 0.41 0.77
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.