Here's Why One Analyst Prefers Charles Schwab

The ongoing price war among online brokers could continue for some time as firms are looking to win over clients by offering superior services at better prices. While this is certainly welcome news for customers, the same can't necessarily be said for investors.

Brennan Hawken of UBS assumed coverage of a few of the leading online broker firms and suggested investors may be better off owning Charles Schwab Corp (NYSE: SCHW) over rival TD Ameritrade Holding Corp. (NASDAQ: AMTD).

Charles Schwab

Hawken assumed coverage of Charles Schwab with a Buy rating and $50 price target (versus a prior Buy rating and $44 price target) as the company's earnings will ultimately prove to be "more durable" than its peers.

According to Hawken, Charles Schwab's reduced pricings will be cheered by customers and at the same time the company can replace the lost economics from the price cuts from its growing bank deposits.

The analyst believes the elasticity of deposit pricing in brokerage accounts is very low and as such the deposit beta in its self-direct customer base could remain low and allow for Charles Schwab to capture a lot of that spread.

Looking forward, the analyst believes investor sentiment will focus on the question "how best to value a balance sheet driven business with minimal credit risk." The answer may be that pre-crisis trust banks could "provide a useful parallel for Charles Schwab's steady rate."

Finally, while it take several years, Hawken believes investors will "eventually change the stock's valuation paradigm."

The analyst's $50 price target assumes a 26x multiple (core of 24x plus two-turns for corporate tax reform) on the company's 2018 earnings per share estimate of $1.90.

TD Ameritrade

Hawken assumed coverage of TD Ameritrade with a Neutral rating and $43 price target (versus a prior Buy rating and $48 price target) as the company's earnings growth could fall short of its peers.

The analyst argued that TD Ameritrade's partnership with a bank (TD Bank) allowed the brokerage to generate higher returns and avoid regulatory capital burdens. However, monetizing the relationship has been "difficult" as TD Bank's revenue has lagged Schwab Bank's over the past few years. This trend calls into question if TD Ameritrade's capital efficiency makes up for the loss of flexibility and better economics.

Hawken also noted TD Ameritrade's synergy outlooks from its $4 billion acquisition of Scottrade may be conservative and take time to realize.

Hawken's $43 price target implies a 20x multiple on the company's 2018 earnings per share estimate (core of 18x plus two-turns for corporate tax reform) of $1.95 plus an additional $0.18 per share coming from the Scottrade acquisition.

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