A Brokerage Trade: UBS Upgrades TD Ameritrade, Downgrades Charles Schwab

Online brokers are getting some attention from Wall Street Monday after one Wall Street analyst adjusted his rating for three popular stocks.

The Analyst

UBS analyst Brennan Hawken upgraded TD Ameritrade Holding Corp. (NASDAQ: AMTD) from Neutral to Buy and raised his price target from $58 to $60.

Hawken also downgraded Charles Schwab Corporation (NYSE: SCHW) from Buy to Neutral and lowered his price target from $57 to $51.

Finally, Hawken initiated coverage of E*TRADE Financial Corp (NASDAQ: ETFC) with a Buy rating and lowered his price target from $67 to $61.

The Thesis

Earnings multiples have compressed in the market for online broker stocks, creating some compelling value opportunities for investors.

Hawken says E*TRADE’s earnings aren't as fragile as the stock’s current multiple suggests.

“We stressed our discount broker models to assess the impact of a downturn on the discount brokers and found that the headwind to earnings from a 15% decline in client assets, a drop in margin balances similar to the 2008 downturn and an increase in cash allocations resulted in a very similar impact to earnings power of the discount brokers, with the impact to ETFC being a 15% drop in earnings,” Hawken wrote in Monday's note.

He said E*TRADE no longer appears to be a buyout candidate in the near-term, but the limited earnings risk and discounted multiple have created a buying opportunity.

Hawken found even less (just 13 percent) earnings downside for TD Ameritrade in the event of a market downturn. In addition, TD Ameritrade’s multiple has compressed by 34 percent relative to the Financial Select Sector SPDR Fund (NYSE: XLF) since 2017, and Hawken said investors under-appreciate the stock’s capital return potential.

Hawken said Schwab’s shares have traded at a valuation premium to peers for years in large part due to anticipation of higher interest rates, but Hawken said the Fed tightening cycle is closer to the end than the beginning at this point. In addition, regulatory uncertainty poses a risk to both valuation and expenses.

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