business

This Discount Broker Looks Like A Bargain

Regarded not many years ago as the new kid on the block, discount broker Charles Schwab has grown fast, outscoring the big boys in the securities business in several ways. Schwab's stock has more than doubled, to 23 from 11 in January. After such a rapid rise, it may have to pause for a while to catch its breath. No matter, say several pros: Schwab is still a stock to own.

"Although it has run up quite a bit, I would rather buy shares of Schwab than, say, Merrill Lynch, mainly because of the dynamic growth that I see in Schwab over the long haul," says Perrin Long, considered the dean of analysts tracking the securities business. He figures Schwab is worth twice its current price based on his earnings projections. Schwab, the largest discount broker, with 1.4 million accounts at its 129 branches around the country, still has a long way to go, says Long, director of equity research at First of Michigan.

Shares of Merrill and other major brokers have also done well, largely because of the market's climb this year. But what's unusual is that investors have accorded Schwab far richer multiples for its earnings and book value than they've given the bigger Wall Street brokers--and should continue to do so. Schwab's stock trades at a price-earnings ratio of 25, vs. 10 to 14 for other broker stocks, and Schwab sells at more than three times its book value of $6.40 a share, vs. about two times for the majors.

Schwab's earnings and revenues are bound to grow even faster because of the new business that Schwab plans to get into: lucrative "wholesale" market-making in over-the-counter stocks. On June 5, Schwab signed an agreement to acquire Mayer & Schweitzer, a market maker in OTC stocks, accounting for about 6% of Nasdaq volume.

EXPANSION TEAM. That will give Schwab an even wider client base, says Long, who expects earnings of $1.05 a share this year and $1.30 next year--up sharply from last year's 62~. By 1994, he's forecasting close to $2. Schwab has added special services to attract financial advisers who are paid fees to manage other people's assets in the $1 million to $500 million range.Schwab has developed a niche business that provides "fast, timely, and efficient" technology-driven trading and back-office services that independent money managers find very helpful, says Steve Hoover of Hoover Management in Boston. Hoover adds that he isn't just a big investor in Schwab--he's a "satisfied customer."

This new business with financial advisers and managers has contributed some 10% to Schwab's revenues, says founder, Chairman, and CEO Chuck Schwab. That has helped assets in its care grow faster, to $36 billion from $30 billion a year ago.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE