Charles Schwab Corp. (SCHW, Financial) (7.4% of Sequoia’s capital at year-end, +0.1% total stock return in 2022)
Schwab’s shares held up quite well this year in the face of the broad market drawdown. Business performance was excellent. For the full year, Schwab’s revenues and EPS are expected to be up approximately 13% and 21%, respectively. Versus 2019, the company’s revenues and EPS are expected to have compounded at annual rates of approximately 25% and 14%, respectively.
The most obvious development for Schwab this year was the rather sudden change in the interest rate environment. In a higher rate environment, Schwab earns more interest revenue on client cash balances. Rates aside, this is a company that has for decades executed a consistently client-friendly strategy. The result is massive scale, a trusted brand, and an ever-expanding portfolio of products and services.
At month-end September 2022, Schwab’s total client assets stood at $6.6 trillion, making it one of the largest wealth management platforms in the US. This scale allows the company to serve its customers well and at a virtually unrivaled cost, creating something of a virtuous circle. Schwab continues to gather client assets from higher-cost channels, where multiple trillions still reside, at an impressive pace. Through the first nine months of 2022, the company grew client assets 6% organically, consistent with trends over the past many years.
Schwab has taken the initiative over the last few years, sending shockwaves through the industry, when it reduced commissions to zero for most trades in 2019. It then quickly targeted TD Ameritrade, acquiring it for $26 billion the following year. The multi-year integration is ongoing, but we already feel comfortable declaring this deal a strategic success.
At the current share price, Schwab trades for approximately 16x expected EPS for 2023. Assuming no change in the interest rate environment and a continuation of business trends, Schwab is trading for a low double-digit multiple of what it’s likely to earn in three years. We consider the current share price an attractive one for a business that has for decades used its scale and client-centric approach to gather assets at a consistent and healthy pace, earns good-to-great returns on equity across a wide range of interest rate environments, and still has many years of growth ahead of it.
From Ruane Cunniff (Trades, Portfolio)'s Sequoia Fund fourth-quarter 2022 letter.
