Charles Schwab (NYSE:SCHW) reported +19% net revenue growth, combined with continued disciplined expense management, trailing 12-month overhead expenses as a percent of client assets fell to just 15.9 bps, which helped drive +55% growth in earnings per share in their most recent quarter. The stock performed poorly, however, as global equity markets fell, investors assumed more conservative future growth in revenue from a reduced asset base. We think volatility related to Schwab’s core asset management revenues has been somewhat offset by the rapid expansion of its banking subsidiary. Over the past several years, Schwab has done a good job executing low-risk strategies with its bank balance sheet, which have yielded outsized returns and should serve to offset some of the revenue volatility seen in prior periods of market turbulence. Though in the short-term, interest rates appear to have peaked, we think the Company still has some opportunity to expand its net interest margin. Along with continued prudent expense management and excess capital to deploy, we expect Charles Schwab to produce above-market growth, despite trading well below a market multiple.
From David Rolfe (Trades, Portfolio)'s fourth-quarter 2018 Wedgewood Partners investor letter.
