On Tuesday, Goldman Sachs (NYSE:GS) adjusted its outlook on Charles Schwab Corp. (NYSE: NYSE:SCHW) shares, increasing the price target to $76.00 from the previous $72.00, while maintaining a Neutral rating.
The adjustment comes in the wake of Charles Schwab's first-quarter results for 2024, which prompted a revision of the earnings per share (EPS) estimates for the years 2024 to 2026. The new EPS forecasts are set at $3.39, $4.23, and $5.24, up from the former $3.31, $4.13, and $5.06, respectively.
The revised estimates are based on a more favorable forward curve and a reduction in deposit outflows, leading to an improved starting point for average earning assets (AEA). Goldman Sachs' 12-month target price increase is also grounded on an earnings multiple of approximately 17 times the estimated EPS from the fifth to the eighth quarter ahead.
Charles Schwab has demonstrated stability in its core deposits for the second consecutive month. Although a decline in deposits is anticipated due to April's tax seasonality and potential sorting activities in the following months, there is an anticipated pathway to a more stable deposit base in the second half of 2024. Client key performance indicators (KPIs) are encouraging, and the macroeconomic environment appears to be improving.
Furthermore, while deposit sweep growth is expected to be driven by cash from organic growth, it is predicted to be at a lower percentage than the current back book levels of around 4%. This suggests that the growth in AEA may be constrained until balances from wholesale funding are reduced. Nonetheless, net interest income (NII) is projected to trend upwards, which should position Charles Schwab for stronger EPS growth moving forward.
The outlook for higher interest rates also contributes to a marginally positive risk/reward scenario for Charles Schwab's stock. However, with the stock trading at a price-to-earnings (P/E) ratio of 16.6 times based on the updated 2025 estimates, significant stock gains are considered likely to be limited, leading to the retention of a Neutral rating.
InvestingPro Insights
As investors digest the revised outlook from Goldman Sachs on Charles Schwab Corp., real-time data from InvestingPro provides additional context to the brokerage firm's financial performance and market valuation. With a market capitalization of $130.13 billion and a P/E ratio standing at 29.32, Charles Schwab is trading at a premium to the market. The adjusted P/E ratio for the last twelve months as of Q4 2023 is slightly lower at 24.74, which may reflect the analysts' confidence in the firm's profitability, confirmed by a positive earnings forecast for the year.
InvestingPro Tips indicate that Charles Schwab has maintained dividend payments for 36 consecutive years, which is a testament to the company's commitment to returning value to shareholders. Additionally, the firm is trading near its 52-week high, underscoring the recent uptick in its share price, with a 35.88% total return over the last six months. This performance aligns with the positive sentiment surrounding the company's stability in core deposits and potential for NII growth.
For readers looking to delve deeper into Charles Schwab's financial health and future prospects, InvestingPro offers a comprehensive suite of tips, including five additional insights not covered here. To gain access to these valuable tips and enhance your investment strategy, consider using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at https://www.investing.com/pro/SCHW.
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