Charles Schwab Terminates $235 Million Lawsuit

In a surprise announcement, Charles Schwab SCHW terminated its $235 million settlement of class action lawsuits related to YieldPlus. Plaintiffs were claiming the right to sue on behalf of non-California class members, which SCHW contends were part of the settlement. Rather than risk the settlement only applying to a subset of investors, SCHW terminated the settlement. This is a modest negative, as distraction from the Yield Plus saga will drag on for at least a little while longer. Plus, the ultimate cost of the lawsuit is now unknown. However, this is a non-recurring item and if SCHW shares come under pressure from this lawsuit, Collins Stewart would use it as a buying opportunity. Collins Stewart reiterates its buy-rating and $21 target for SCHW. It recognizes the challenging environment is not ideal for SCHW's business model, but believe the risks are well understood. The shares are cheap based upon the company's long-run earnings power, but recognize that expectations for higher rates are needed to drive meaningful near-term upside in shares. SCHW closed Monday at $15.79