Thousand Oaks, CA – A recent comprehensive analysis of The Charles Schwab Corporation (SCHW) delves into its intrinsic value using two sophisticated valuation models: the Buffett-Inspired Valuation Method and the McGrew Valuation Method. As a prominent brokerage and financial services firm, SCHW’s valuation necessitates a tailored approach due to its unique cash flow dynamics and regulatory environment. The analysis, utilizing financial data as of March 31, 2025 , aims to determine if SCHW, with a last closing price of $91.48, presents a compelling investment opportunity.
Company Classification and Valuation Methodology
Charles Schwab is categorized as a Financial Services company, specifically a brokerage, according to industry classifications from platforms like Yahoo Finance and Google Finance. This classification is crucial as it dictates the use of “Distributable Earnings” instead of “Free Cash Flow (FCF)” for valuation purposes. Distributable Earnings are considered a more accurate reflection of the cash available to shareholders in financial firms, as they account for regulatory capital requirements and non-cash charges. The analysis relies on SCHW’s quarterly financial statements, including cash flow, balance sheet, and income statement data.
Key Financial Metrics (as of March 31, 2025):
- Last Closing Price: $91.48
- Shares Outstanding: 1,815,972,799
- TTM Net Income: $6,489,000,000
- TTM Depreciation and Amortization: $1,424,000,000
- TTM Capital Expenditure: -$588,000,000
- Total Debt: $39,880,000,000
- Cash and Cash Equivalents: $35,009,000,000
- Restricted Cash: $38,408,000,000 (assumed to represent client funds)
These figures are directly sourced from provided financial data, avoiding speculative assumptions. However, the absence of explicit data on increases in regulatory capital may impact Distributable Earnings calculations, and Derivative Gains/Losses were not reported and thus assumed to be zero.
Distributable Earnings and Growth Rate
For financial services firms, Distributable Earnings are calculated as Net Income + Non-Cash Charges (e.g., Depreciation and Amortization) – Increase in Regulatory Capital Required for Growth. Given the lack of specific regulatory capital increase data, Distributable Earnings were calculated as Net Income + Depreciation and Amortization, acknowledging a potential overestimation.
TTM Distributable Earnings (03/31/2025): $6,489,000,000 (Net Income) + $1,424,000,000 (Depreciation and Amortization) = $7,913,000,000
To classify SCHW for the McGrew Valuation Method, the 5-year Compound Annual Growth Rate (CAGR) of Distributable Earnings was calculated using historical data:
- 2020: $3,913,000,000
- 2021: $7,019,000,000
- 2022: $8,439,000,000
- 2023: $6,405,000,000
- 2024 (estimated): $8,776,000,000
The calculated CAGR of 22.4% exceeds 10%, classifying SCHW as a growth stock for the McGrew Valuation.
Adjusted Net Debt
Financial services firms often hold significant restricted cash, such as client funds, which offset corresponding liabilities. The Adjusted Net Debt calculation for SCHW is:
Adjusted Net Debt: ($39,880,000,000 – $38,408,000,000) – $35,009,000,000 = -$33,537,000,000
Since Adjusted Net Debt cannot be negative, it is set to $0. This adjustment highlights SCHW’s strong liquidity, with substantial cash and restricted funds offsetting its debt obligations.
Buffett-Inspired Valuation Method
This method, designed for financial services companies, employs a conservative 3% constant growth rate for projecting Distributable Earnings over 10 years. An 8% discount rate (4% Treasury + 4% premium) and a 2.5% perpetual growth rate are also used.
The key steps and results are:
- Projected Distributable Earnings (Year 1): $8,150,390,000
- Projected Distributable Earnings (Year 10): $10,628,404,644
- Terminal Value (Year 10): Approximately $198,074,813,818
- Total Enterprise Value: $139,374,606,026
- Equity Value: $139,374,606,026
- Intrinsic Value per Share: $76.74
- Price with 25% Margin of Safety: $57.56
Comparing this to the last closing price of $91.48 , the Buffett-Inspired method suggests SCHW is trading at approximately 19.2% above its intrinsic value, leading to a “Hold” status.
McGrew Valuation Method (Growth Stock)
For growth stocks like SCHW (with a CAGR over 10%), the McGrew Valuation Method initiates with a 3-5 Year Distributable Earnings CAGR (capped at 15%), linearly declining to 6% by Year 7, and maintaining 6% for Years 7-10.
Key steps and results:
- Growth Schedule: Starts at 15% (capped from 22.4%) and declines to 6% by Year 7
- Projected Distributable Earnings (Year 1): $9,099,950,000
- Projected Distributable Earnings (Year 10): $15,845,766,659
- Terminal Value (Year 10): Approximately $295,302,915,000
- Total Enterprise Value: $197,566,496,377
- Equity Value: $197,566,496,377
- Intrinsic Value per Share: $108.79
- Price with 25% Margin of Safety: $81.59
Based on the McGrew Valuation, with a last closing price of $91.48, SCHW is trading at approximately 15.9% below its intrinsic value, resulting in a “Buy” recommendation.
Financial Health: ROE and ROTA
To further assess SCHW’s financial health as of March 31, 2025, TTM Return on Equity (ROE) and Return on Tangible Assets (ROTA) were calculated:
- ROE: ($6,489,000,000 / $36,770,500,000) * 100 ≈ 17.65%
- ROTA: ($6,489,000,000 / $465,843,500,000) * 100 ≈ 1.39%
The ROE of 17.65% signifies strong profitability relative to shareholders’ equity, indicating efficient capital utilization. The ROTA of 1.39% is considered typical for financial services firms, given their substantial asset bases, which include client funds and investments.
Valuation Results and Investment Implications
| Stock Ticker | Valuation Method | Intrinsic Value per Share | Price with 25% Margin of Safety | Last Closing Price | Valuation Status |
| SCHW | Buffett-Inspired | $76.74 | $57.56 | $91.48 | Hold |
| SCHW | McGrew | $108.79 | $81.59 | $91.48 | Buy |
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The analysis presents a mixed valuation picture for SCHW. The conservative Buffett-Inspired Valuation suggests that SCHW is slightly overvalued, leading to a “Hold” recommendation. Conversely, the McGrew Valuation, which incorporates SCHW’s robust historical growth, estimates a higher intrinsic value, suggesting the stock is undervalued and warrants a “Buy” recommendation. This divergence stems from the McGrew method’s more aggressive growth assumptions, which may better reflect SCHW’s potential as a growth stock within the brokerage sector.
Investors should consider these differing perspectives based on their individual risk tolerance and growth expectations. SCHW’s strong ROE and stable ROTA reinforce its solid financial health and position as a leading brokerage. However, the analysis notes limitations, such as the absence of detailed regulatory capital increase data and Derivative Gains/Losses, which could potentially lead to an overestimation of Distributable Earnings. Investors are advised to verify these assumptions with additional SEC filings if possible. As always, market conditions and personal investment goals should be carefully considered before making any investment decisions.