Charles Schwab (SCHW) settled some major litigation with securities regulators today. The agreement will cost the firm $118.9mm thanks to loads of high-risk securities stuffed into a bond fund marketed as a low-risk product. The credibility from “Uncle Charlie’s” own money in the fund wasn’t enough to avoid harm to the firm bearing his name.
The stock market obviously didn’t think much of the penalty as SCHW was off only four cents today. The stock is trading pretty close to its 52-week high and analyst sentiment is fairly bullish, so plenty of people think the worst is past. The remaining question is whether such optimism is warranted by the fundamentals.
The P/E ratio is over 42, an astoundingly high multiple for a mature firm in a heavily regulated industry. A quick glance at three years’ worth of income statements shows a progressive collapse in both gross revenue and net income. The quarterly income statements for 2010 show that the decline in gross revenue has not been halted. SCHW will need blowout results for Q4 2010 to justify the confidence of all those mainstream analysts.
Schwab still benefits from a strong brand and leading market position among discount brokers. Schwab’s best days may very well be ahead, but its worst days may not be completely behind it yet.
Full disclosure: No position in SCHW.