The Charles Schwab Stock Corp (SCHW) released its earnings today for Q3 and showed impressive asset management growth. In addition, adjusted net income was slightly higher than expected. As a result, SCHW stock looks cheap now.
Schwab reported that adjusted diluted earnings per share (EPS) was 77 cents. That was higher than analyst estimates of 74 cents for the quarter. Moreover, the company was successful in raising more assets to manage.
As a result, asset management fees rose 16.9% to $1.224 billion for the quarter, up from $1.047 last year. However, its net interest revenue fell from $2.926 billion to $2.237 billion.
This led to lower total revenue at $4.6 billion, down from $5.5 billion last year in Q3. This was largely expected as analyst estimates were for $4.61 billion in revenue for Q3.
Nevertheless, Schwab reported a 14% return on average equity (annualized) for the quarter. That is a solid return for a company that has had a large drop in revenue.
Valuation Looks Cheap
In morning trading on Oct. 16, SCHW stock is trading for $53.97 per share. That is well below where it was 3 months ago. For example, on July 20, SCHW stock was at $67.20. That shows that it has fallen almost 20% in the last 3 months.
Moreover, its valuation looks inexpensive at these prices. For example, analysts project EPS of $3.17 for 2023 and $3.97 for 2024. That puts SCHW stock on a forward multiple of 17x for 2023 and 13.6x for 2024. So, on average over the next 12 months, the forward P/E is 15.3x.
This is well below its historical averages. For example, Morningstar reports that its average 5-year price-to-earnings (P/E) multiple is 18.59x. This implies that SCHW stock could rise by 21.5% (i.e., 18.59x / 15.3x).
That means the implied price target for SCHW stock is $65.57 per share, or close to where its former high prices were during the summer.
Shorting OTM Puts for Income
This also means that selling short out-of-the-money (OTM) put options is a good way to wait for the stock to reach this price target. It also allows the investor to gain extra income.
For example, $47.50 strike price puts for the November 17 expiration period trade for 51 cents per contract. That means that any short seller of these puts can make an immediate 1.073% yield (i.e., $0.51/$47.50).
What's more, this strike price is over 11.4% below today's spot price. That gives investors who sell these puts short plenty of downside protection.
In addition, on an annualized basis, an investor has an expected return of 12.876% if it can be repeated every month over the next year. That is a very good return to supplement the stock's 1.73% dividend yield today.
Moreover, some investors might be willing to take on more downside risk. As a result, they could short the $50 strike price expiring Nov. 17. The premium received doing this short sale is 92 cents. This strike price is 6.77% below today's spot price.
The premium received from selling these puts short represents an immediate yield of 1.84%, or over 22% on an expected return basis over the next year. These are indeed very attractive returns for the put option short seller.
The bottom line is that SCHW earnings were very good, its price is well below its inherent value, and there are good ways to make income now by selling short out-of-the-money puts.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
