Charles Schwab's Valuation Could Jump 20% Thanks to Tax Cuts: Forbes
Charles Schwab stands to benefit from a reduction in the corporate tax rate if the Republican-led tax reform bill gets approved. With most of its operation in the U.S., the San Francisco-based discount brokerage has a corporate tax rate that Forbes contributor Trefis.com says is among the highest, with taxes increasing 16% annually since 2011. As a result, if the tax rate for corporations gets reduced to 20% or 22%, The Charles Schwab Corporation (SCHW) would see a big benefit to the tune of a 20% increase in its valuation. Trefis.com is a platform created by a team of MIT engineers and Wall Street analysts that helps investors understand how companies products' affect share prices.
"While the statutory rates in the U.S. are quite high, most companies end up paying a significantly lower effective rate as deductions and credits help to reduce their tax liabilities," wrote the Trefis.com team. "The effective tax rate paid by Charles Schwab, around 37% in the past five years, is in fact much higher than that paid on average by other companies in the U.S." Trefis.com estimates that, during 2016, Schwab's effective tax rate was 36.9%, with the company paying taxes of $1.1 billion. If that tax rate were lowered to 22%, Schwab's tax liability would have been $660 million. Trefis said that a drop in the tax rate to 22% would increase Schwab's net income by close to 25% and thus give the brokerage the 20% boost in valuation.
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But it's not just tax reform that has gotten some Wall Street watchers giddy about Charles Schwab's prospects in the New Year. Earlier this month, JPMorgan Chase named Schwab and BlackRock, Inc. (BLK) as top picks for 2018. JPMorgan analyst Kenneth Worthington said that he expects Schwab to benefit from higher interest rates in 2018 and swelling bank assets. The analyst has a $52 price target on Schwab stock. "We see potential for SCHW shares to perform well around the higher interest rate outlook and growing bank assets. We expect Schwab bank asset growth to increase substantially with faster and larger transfers from money market fund assets to bank assets," wrote Worthington.
Meanwhile, Credit Suisse recently initiated coverage of Schwab shares with an Outperform rating and a $55 price target. Credit Suisse analyst Craig Siegenthaler said that Schwab's client-centric business strategy should enable it to generate "significant" value for its investors. Recently, shares of Charles Schwab were trading at $50.93, down $0.63 or 1.22%. The stock is up nearly 22% so far this year.