UBS Upgrades Charles Schwab: 'A De-Risked, Quality Name'

Charles Schwab Corporation SCHW shares got a boost on Tuesday after the company landed a high-profile analyst upgrade on Wall Street.

The Charles Schwab Analyst: UBS analyst Brennan Hawken upgraded Charles Schwab from Neutral to Buy and raised his price target from $68 to $75.

Related Link: SEC Chair Gensler Proposes 'Open And Transparent Auctions' As Alternative To Controversial Payment For Order Flow

The Charles Schwab Takeaways: In the upgrade note, Hawken said concerns over cash sorting and payment for order flow (PFOF) have now been fully priced into Schwab shares, which are down roughly 35% from January highs.

Cash sorting is the dynamic of customers transferring balances into higher-yielding alternatives. Scwab's money market funds balances grew by $7.4 billion in May, up 5% month-over-month.

In addition, Hawken said Schwab is a "de-risked, quality name," and its business is relatively insulated from credit and market risk. He said its earnings multiple could hold up better in future economic cycles than in previous ones if inflation keeps interest rates above zero.

Regulatory risk to PFOF is still unknown at this point, but UBS estimates a 10% reduction in PFOF revenue would result in a 1.4% reduction in earnings power for Schwab.

"SCHW's business model is the least market sensitive of the WM firms in our coverage, with EPS dropping only -2% compared to the group average of -11%, under a -15% equity market return assumption for FY22," Hawken said.

Schwab shares are trading at just 13 times UBS's fiscal 2023 EPS estimate, and Hawken pointed out the stock's earnings multiple troughed at 14 during the last cyclical economic downturn.

Benzinga's Take: U.S. Securities and Exchange Commission Chair Gary Gensler recently described a new requirement for brokers to submit retail investor orders to a new auction process through which firms will bid against each other to fill them.

Yet the SEC chair made clear the regulator is seemingly a long way from an official policy change that would ban PFOF.