. Discount Broker's Stock is No Discount (SCH)
Thursday, January 14, 1999
Value advisor and ex-Schwab VP Joe Shaefer has nothing but
praise for his former company: "one of the best in America
and whose CEO is unquestionably the best in the world --
Charles Schwab (SCH)." He lauds Schwab as "a fundamentally
sound company with a lock on future growth" and says that
the firm has overtaken Merrill Lynch as the premier
brokerage firm in America.
All that said, Shaefer just issued a sell recommendation on
Schwab saying Internet frenzy drove the price too high.
Shaefer says Schwab is "certainly worth $40 or more a
share," but not the $56 per share price it closed at on
January 13, 1999. That price no longer reflects its top
status and the "inevitable future earnings increases" it
will bring; instead "it now sells at a PE of Reality times
Future Earnings times Internet Speculation Value," Shaefer
says.
Shaefer concedes that Schwab can run its online trading
operation without significantly increasing its fixed costs.
But he is concerned that online trading is both driving down
the firm's cost per trade and cannibalizing its non-electronic
investor base; both costs and revenues are decreasing in the
firm's electronic business. "Whether Schwab makes a 40% margin
by charging $42 for a trade that costs them $25 in salaries,
benefits, branch office leases, office picnics, floor trading
fees and so on, or whether they make 40% margins based on
charging $25 for a trade that costs $15 in constant system
upgrades, higher priced systems analysts and programmers,
floor trading fees, etc. -- it's still the same 40%," Shaefer
says. "I'll buy the company aggressively when the Internet
bubble bursts."
For more on Joe Shaefer's recommendation see "Featured
Companies," January 1999, Investor's Edge. Joseph Shaefer
provides no-nonsense value-oriented stock picks, stock &
mutual fund portfolios. |
