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Published: May 12, 2010
There is a company that has long been one of the top holdings in
the mutual funds of legendary asset manager Ron Baron. I
wondered why Mr. Baron has, for so long, put so much faith in
this entity. I did some research and discovered the answer was
literally encapsulated in a person's face.
Some companies have a signature item or logo. Other companies
rely simply on word of mouth. However, a few of the world's top
companies rely on a person. It's difficult using a real person
as a company's calling card because that person has to project
everything the company stands for, and if something goes wrong,
that same person must be able to take the heat.
Charles Schwab (Nasdaq: SCHW) is the literal face of his
eponymous company. He is his own brand. It is this brand, its
reputation and its financial success that has convinced Mr.
Baron to keep Schwab as a top holding for so many years. Charles
Schwab himself clearly represents something to people. His face,
his tone of voice and his reputation suggest strength, elegance,
affluence and most of all, stability.
Using its stable reputation and targeted marketing, Schwab
wisely focuses on earning a customer's trust. When it comes to
money, particularly in this environment, the last thing an
investor wants to worry about is whether he's parked his assets
in a potentially insolvent brokerage house. The company debuted
a new marketing strategy in 2004, the "Talk to Chuck!" campaign,
which was designed to further the trust people had in the
company by projecting an image of accessibility. It paid off.
The Journal of Financial Advertising voted it the Best Brokerage
Ad Campaign and Best in Show for Financial Services Advertising.
Why spend so much time understanding the company image? Because
it's the key to understanding how Schwab operates internally, as
well. That way, we can determine, if the company is good enough
for Ron Baron, is it good enough for the average investor?
Stability is a very good reason investors should take a look at
Schwab. During the global credit crisis, nobody heard a peep out
of the company. That's because it had not put itself in a bad
position by holding exotic securities and debt that nearly
cratered peers like E-Trade Financial Corporation (Nasdaq:
ETFC). The company's $1.3 trillion asset base is rock solid.
However, those same exotic securities were sold by Schwab to
clients. As a result, Schwab did struggle a bit with trust in
the summer of 2009, when New York Attorney General Andrew Cuomo
sued Schwab for civil fraud over the selling of auction-rate
securities to clients. These short-term illiquid debt
instruments resulted in billions of losses for clients. Schwab
put the blame on the creators of the securities, saying, "Schwab
brokers, while trained to levels beyond industry standards,
could not be expected to foresee and disclose market risks that
even regulators and market experts did not foresee." The case
has not been settled, although Schwab settled a similar one with
the federal government for $200 million in April. This is
serious stuff, and it might sink a lesser brand. Instead,
Schwab's client and asset base continues to increase. This past
quarter the company added 230,000 new clients and its
exchange-traded fund (ETF) advisory services took in $500
million in new client assets.
That kind of Teflon branding says a lot
about Schwab.
Financially, Schwab is in a very strong position. Revenue was
off -12% this quarter, as Schwab moved to compete with other
discount brokerages by changing from a tiered
commission structure to a flat fee for online trading.
However, trading euphoria has returned to the markets, resulting
in a +48% increase in
margin loans as investors returned to their leveraging ways
to take advantage of the overall market upswing. Operating
margins have been increasing since 2003, due to strict cost
controls put in place.
Schwab generated $1.3 billion in free
cash flow in 2009, a trend that continued into 2010. It sits
on $26 billion in cash and $37 billion in other investments,
allowing it to generate income from other sources besides client
advice and brokerage services. Schwab earns more on
interest-bearing investments than it pays in liabilities, so if
interest rates rise as many expect, that will only benefit the
company.
We have entered a new era of market volatility, and that is
unlikely to change. People should, and will, seek out stability.
Charles Schwab is the very face of stability. This is a
long-term buy-and-hold stock, just like Ron Baron believes. At
current prices near $18.00, the stock sits well below its
all-time high of $42, and below the pre-2008 crash high of
$24.00. It's a good entry point.
-- Frederick Steier
Contributor
StreetAuthority |
