Hawken upgraded the stock to Buy from Neutral on Tuesday, sending the shares higher. He also increased his price target to $75 from $68.
“SCHW is relatively insulated from both credit and market risk; therefore, we believe SCHW is well-positioned to outperform,” Hawken wrote.
Schwab’s business model makes the company the least sensitive to market and credit risk out of its wealth management peers, Hawken wrote. The discount brokerage is also more levered to movements in interest rates, he added. In an environment where a recession is more likely than not, according to some experts, having some insulation from market vicissitudes is a strong benefit working in the stock’s favor.
The analyst is predicting that Schwab’s asset management business could turn in moderate growth despite a market pullback in 2022.
Hawken is bullish on Schwab even with the risk that Securities and Exchange Commission Chair Gary Gensler is likely to change the traditional framework for brokerages. Currently, orders are sent from brokers like Schwab to trading firms to execute the order, which in return receive a fee called a payment for order flow. The proposal would switch the work flow, transitioning it to an auction-based model where exchanges bid for individual orders. About 50% of Schwab’s trading revenue comes from payments for order flow, Hawken estimated, and a decrease would negatively impact earnings power.
However, investors have already taken these risks into account and the stock has repriced accordingly, Hawken wrote, and any changes “should have a relatively muted impact” on Schwab’s earnings per share outlook.
Wall Street overall is optimistic on the stock. Of the 17 analysts covering Schwab, 82% rate it a Buy-equivalent, while 18% rate it a Hold.
Shares of Schwab were up 4% to $62.35 on Tuesday. The stock has dropped 25% year-to-date.
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