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Non-Tech : Charles Schwab (SCH) -- A tech-stock profile? -- Ignore unavailable to you. Want to Upgrade?

To: Richard Forsythe who wrote (971)	10/17/1999 4:37:00 AM
From: Mick Mørmøny	Read Replies (3) \| Respond to of 1390

Re: I wonder what EGRP's net new assets are? Not much, I think. $$$ Schwab Counters a Pincers Movement By PATRICK McGEEHAN The Charles Schwab Corp., a pioneer of discount stock brokerage and even cheaper on-line brokerage, is getting it from all sides these days. After staking out a position between low-cost electronic trading shops and traditional brokerage firms, Schwab finds that both ends are moving toward the middle: Deep discounters like ETrade Group are adding services for investors, while full-service firms like Merrill Lynch are offering on-line trades at a discount. The brewing storm of competition has frightened investors out of Schwab's stock, which has fallen more than 60 percent from its high in April, to $28.50 on Friday. In an interview last week, Richard K. Strauss, an analyst at Goldman Sachs Group, talked about Schwab's predicament, its prospects and why he thinks it will hit $50 within a year. Here are excerpts from the conversation: Q. Why did Schwab go from being a darling to getting dumped so quickly? A. Schwab's stock tends to go through a bad period once every couple of years. Typically, the cause is that Schwab is transforming itself, facing a new competitor or there's a slowdown that is either seasonal or cyclical. Those tend to be the things that change the fortunes of Schwab's stock. However, the company has an incredible track record of making those downdrafts into buying opportunities. Q. Which of those usual suspects is the culprit holding down Schwab's stock this time around? A. This right now is more of a seasonal slowdown. But it's also a smoke screen of sorts from other E-brokers who are talking about adding accounts but not talking about growing assets profitably. Q. Those competitors certainly are talking -- and advertising -- plenty. Isn't Schwab going to have to match the huge ad budgets of these upstart firms? A. If you look at ETrade and Ameritrade combined, their marketing budget next year is going to be well over $500 million. That's more than double what Schwab will be spending. Schwab has over $600 billion in customer assets. E*Trade and Ameritrade combined have no more than $50 billion. The economics speak for themselves. Q. But by doing all that advertising and price-cutting, aren't they putting pressure on Schwab's profit margins? A. Not necessarily. Look at what Schwab has done in 1999. They have brought in $75 billion of net new money and their profit margin during that period has averaged close to 15 percent of revenue, which is the highest their margin has ever been. Of the $75 billion they've brought in, $25 billion came in this summer during a slowdown that really was a stealth bear market. Q. How long can they keep up that pace of gathering assets in the face of increasing competition late in a long bull market? A. Schwab's customer-asset base has gone from $7 billion to $600 billion in 12 years. There have been some pretty hairy markets during that time but Schwab has continued to take in assets during those periods of turmoil. The company's profits have been growing 35 to 40 percent a year. My growth projection for them now is 25 to 30 percent. Even with the seasonal slowdown this summer, their earnings should be up close to 60 percent this year. My forecast for their long-term growth is higher than it's ever been. Q. Is the new money rolling into Schwab in bigger or smaller chunks? A. The average new account they're bringing in starts out with $44,000 and that's 42 percent bigger than their new accounts were last year. The company's average account size now is about $100,000. That's the kind of account that a full-service broker like Merrill Lynch would be going after. Q. Speaking of Merrill Lynch, that firm is about to offer on-line trades for $29.95 each, the same price Schwab charges. How much of a threat is that to Schwab? A. Financial services is an incredibly fragmented industry. Merrill has $1.5 trillion of customer assets but that's only about 3 percent of the total investable assets in the U.S. The moves that Merrill is making have been painful for Merrill in the short term. But if anyone has the capital and the staying power to compete with Schwab, it's not the E-brokers, it's the full-service brokers. It will depend on how quickly they can get their cost structure down so they can continue to offer great service but at a better price. Q. So Schwab is being smart in positioning itself as an alternative to the traditional brokers rather than competing against the little guys on price? A. Schwab is competing with anyone who is trying to gather assets. In the asset-gathering world, it's getting more and more difficult to accumulate assets, in part because there are so many competitors and partly because more people are choosing to do it themselves. To a large degree, Schwab has enabled and empowered that trend.