Charles Schwab stock (NYSE: SCHW) is all over the market headlines as they plan to finalise the Schwab-TD Ameritrade merger today. The acquisition is a strong chess play from the brokerage giant. However, an investment in the new company is not without risks, which the bears are making painstakingly clear. This article will look to cover the merger while providing the arguments from both sides of the 2021 fence.
Table of contents
- Overview of the merger
- Why are investors bullish on SCHW for 2021?
- Bearish counter-arguments
Overview – TD Ameritrade Charles Schwab merger
Charles Schwab is set to merge with Toronto-Dominion Ameritrade on Tuesday the 6th of October. The significant catalyst comes after the Federal Reserve Board gave the green light on the 30th of September. It looks like the merger is a strategic move to combat the evergrowing low-commission disruptors like Robinhood. The $26 billion deal will see Schwab acquire 43% of TD in return TD will receive “9.9% of voting and 3.7% of non-voting shares in the new company“. It seems competitors might be left with revenue crumbs after the deal. Especially, as the new company will hold a whopping $5.6 trillion in total assets. Schwab surged 7% this week on the merger news. Indicating investors are modestly bullish.
Why is the Charles Schwab stock looking bullish for 2021?
Bullish investors hold an optimistic outlook for Schwab because of two reasons. These include the potential for an oligopoly and forward-looking financials.
While a potential Oligopoly might not be suitable for the industry, it could be good for Schwabitrade. The sheer size allows the new company to lose money on commission fees and make up for it in volume. Schwabitrade’s economies of scale do not stop at volume and should trickle down to advertising and other marketing expenses. Moreover, the merger places more pressure on other brokers to slash their commission fees. Consequently, the revenues of other brokers will suffer. Schwab understood the impact and was ahead of the transition to zero commission to mitigate a potential competitive disadvantage.
Charles Schwab is showing financial strength in its price to earnings ratio (P/E), future earnings per share (EPS) growth, and manageable debt to equity levels. The discount broker holds a PE multiple of 15.4x. When comparing their PE multiple to the industry average of 22.3x and the US market average of 18.5x, investors can draw out two conclusions. First, Schwab’s earnings growth will be less than that of its competitors and the industry. Second, SCHW will likely lean to the undervalued side. In turn, providing investors with an opportunity to snap up shares at a discount potentially.
Furthermore, SCHW’s EPS forecasts support the low-to-good P/E ratio. Analysts forecast EPS to hit a low of $1.81 in December 2021 but then rise to an all-time high in December 2024. Thus, suggesting a decline in earnings in the short-term but a positive correction over the next four years.
Bearish concerns on the Charles Schwab stock
Despite the optimism, many bearish investors are raising concerns. In particular, competitors capitalising on technology and potential mishaps in a long-term technology merger.
Being a giant in the evolving brokerage industry is a double edge sword. Because higher volume makes it difficult to change at the speed of the industry. While technology allows companies such as Schwab to change swiftly investors cannot disregard how long it takes an enormous company to adapt. Not to mention the integration will not be done until “April 2022 at the earliest and by October 2023 at the latest“. Consequently, investors should factor in possible delays in their investment.
Furthermore, the Robinhood-like broker will only continue to grow, which is a problem for brokers like Schwab-TD. Because these companies can build from the ground up in the direction of the industry. Overall, being an industry behemoth might provide increased profit on volume but acts as a drawback for rapid change.
Summary – YIG Takeaway
Before I begin, I remind our viewers that this is not financial advice. Instead, the information above is an investment commentary from extensive research.
Overall, the Schwab-TD merger is a positive long-term catalyst. The ability to achieve economies of scale will likely see the new brokerage force score higher profit margins. However, the news is a forward-looking statement. In which the benefits of the merger, market dominance, and higher profits, will not be truly realised until 2022. Therefore, investing in the hope of a quick buck come today’s announcement might not be the smartest play (opinion not advice).
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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Senior Manager of YIG.