1. 1
KSU Student Managed Investment Fund LLC.
Eli Hogan
eli.hogan20@gmail.com
Analyst- FinancialSector
Jamari Johnson
mareesafari22@gmail.com
Analyst- FinancialSector
March 3, 2016
New Holding Proposal
Charles Schwab Corp. (SCHW)
Company Profile
Charles Schwab Corp. (market cap 38.92B) is a large
financial services provider headquartered in San
Francisco, California. Schwab employs 15300
people and offers passively and actively managed
funds, financial advisement, wealth management,
and brokerage services.
Schwab Funds
Schwab offers a very wide variety of both passively
and actively managed investment solutions. Money
market AUM was approximately 161 billion dollars
in 2015. Schwab frequently waives fees on these
funds, which brought the average expense ratio
from .59% to .17% percent. Even at these reduced fee rates, Schwab’s money market sector
still brought in 275 million dollars in revenue. Mutual fund expense ratios are competitive
with other companies in the asset management industry, ranging from .25-1.5%. Exchange
traded fund (ETF) expense ratios are among the industry’s lowest among all categories. For
example, broad market fund SCHB has a .03% expense ratio. Additionally, all Schwab funds
trade commission free on the Schwab platform, giving investors an additional incentive to
keep more of their money with Schwab.
Advisory Services
Schwab advisors have a reputation for providing sound financial guidance. Schwab charges
an average of .52% of client AUM to provide guidance. Schwab’s wealth management
segment earned 898 million USD in 2015. Additionally, Schwab managed to increase assets
receiving active advisement by 7.2% from 2014 to 2015. Between Schwab’s reputation for
SCHW Industry
Average
Current
Price
$27.84 -
Target
Range
$27.02-
$42.30
-
Market Cap $38.92B -
P/E 27.08 15.9
PEG 1.02 1.38
ROA .88% 2.31%
Beta 1.6 1.5
Dividend
Yield
.86% 2.4%
Price/Book 3.085 1.73

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providing quality advice and the introduction of Intelligent Portfolios, their new robo-
advisor service, we forecast continued growth in this segment.
Brokerage Services
Schwab offers
brokerage
services
through its
online
platform.
Revenue
derived from
this segment
totaled 866
million in
2015. At
$8.95,
commission
per trade is
among the highest in the industry, yet it does not seem to have affected client growth. New
accounts of all types have been growing, but brokerage accounts have been the highest
growth area.
Past Performance
In 2015, SCHW outperformed the S&P 500 and the financial sector (IXM) as defined by
McGraw-Hill Financial. While both indices lost value, Schwab was up almost eight percent.

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Over the past five years, SCHW has beaten both indices quite handily.
Most impressive of all is Schwab’s ten-year performance. While investors must be careful
not to let past performance dictate expectations for future returns, we can at the very least
say that SCHW is a historic outperformer.
Management
Charles Schwab (Chairman and Founder)- Schwab served as the chief executive officer
of his company from 1986 until 2008. He built the company from the ground up. He also
currently serves as a director of Yahoo.
Walter W. Bettinger (President and Chief Executive Officer)- Walter Bettinger has been
Chief Executive Officer and President since 2008. There are no expectations of departure.

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Joseph R. Martinetto, (Senior Executive Vice President and Chief Executive Officer)-
Joseph Martinetto has been Senior Executive Vice President and Chief Executive Officer
since 2015. However, he has been with the company since 1997.
There have not been any significant changes in management at Schwab. The company has
stated that if there is a change in CEO, the firm will promote from within, ensuring the new
executive will have extensive knowledge of Schwab’s operations and continuing culture of
excellence.
Recent News
Schwab ranked as one of Fortune’s “Fifty Most Admired Companies.” Schwab also
placed first for innovation and social responsibility in the financials sector. This generates
enormous goodwill for the firm.
Schwab lowers ETF expense ratios, including lowering expenses on broad market
fund SCHB to an industry low .03%. Schwab is winning the ETF price wars. The only
other companies that are capable of offering such low expense rates seem to be Vanguard
and Blackrock (BLK).
Growth Catalysts
Roboadvisors: Roboadvisors are automated financial advising services. They charge
remarkably low fees as a result of being low touch and not requiring face-to-face
advisement. AUM has grown consistently over the short time roboadvisors have been
available to the public, but there are concerns over whether such a low-margin business
segment can be a viable long term asset for companies like Schwab. However, there is a flip
side to this coin. While extremely low fees may keep roboadvisors from being particularly
lucrative, they also draw in investors who previously didn’t have the enough money for
financial advisement to make sense. Schwab offers a highly advanced roboadvisor called
Intelligent Portfolios. Schwab derives revenue from this segment by charging service fees
to the ETF providers it links investors with.
ETFs: Exchange traded funds are investment vehicles that passively track a given index.
Schwab offers some of the lowest expense ratios in the industry, and all of its ETFs trade
without transaction costs through its brokerage service. Additionally, through its ETF
OneSource platform, Schwab offers over 200 other provider’s ETFs with no commission.
Schwab derives revenue from this platform by charging ETF providers a fee in exchange for
offering their products more low-cost exposure.
Aging Populace: The average American’s age is rising rapidly. Studies have shown that
over 90% of people who inherit money switch financial advisors. In such an environment,

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Schwab’s reputation for top notch customer service and financial advice will play a huge
role in drawing new clients with large amounts of inherited assets. Additionally, as the
average age in the U.S. rises, retirement advisory demand will increase. Clients will
naturally seek out the firms with the best reputation.
Interest Rates Rising: Schwab has massive cash balances under management in its money
market accounts. For the past several years, it has waived fees on these accounts in order
to avoid rates turning negative and clients taking their money elsewhere. These fees have
amounted to roughly 700M USD each of the last two years. As interest rates normalize,
Schwab will be able to stop waiving the fees. Unlocking this source of revenue will boost
Schwab’s earnings by a huge margin. The impact of these fees cannot be overstated,
Schwab’s net income was around 1.4B USD last year. Adding 700M in revenue every year
represents an almost 50% boost to net income, as there will be no new costs associated
with the fees.
Competitor Comparison
Schwab’s metrics compare favorably to other asset management companies.
Market
Cap
(Billions)
2015
Return
P/E PEG P/B D/E 2015 AUM
Growth
Schwab 34.2 7.86% 24.72 1.02 2.8 .22 2%
Blackro
ck
52.94 (3.74%) 15.86 1.41 1.9 .17 (.01%)
Invesco 11.6 (16.96%) 12.03 1.07 1.4 .95 (2.01%)
State
Street
22.39 (16.94%) 12.38 1.46 1.2 .63 (8.1%)
T. Rowe
Price
17.47 (18.01%) 14.95 1.56 3.6 N/A 5.9%
2015 AUM growth was the second highest in the sector, trailing only T. Rowe Price. Out of
the group examined, it has the lowest PEG metric. While P/E and P/B ratios are higher than
most peers, we believe this is a result of investors’ anticipation of growth and are therefore
not worried. D/E also compares favorably to most competitors. Schwab showed its overall
strength by being the only company out of the group to actually appreciate in value over
the course of 2015.

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Valuation
We used the P/E multiple
method to analyze SCHW’s target
range. Using this method, we
determined a target price of
$27.02-$42.30. By this method,
Schwab is undervalued.
Additionally, we believe there is
room for even more upside.
Schwab has beat earnings
expectations for two of the past
three quarters, and the company
has strong tailwinds over the
next few years as interest rates
normalize.
SWOT
Strengths
Diversified Business- ETFs, mutual funds, advisory
services, brokerage fees
Rising Demand- higher volatility means more
demand from skittish investors
Reputation/Culture- highly rated in social
responsibility and innovation, reputation for
excellent customer service
Weaknesses
ETF Fees- low fees make for low profits
International Presence- only international offices are
in Hong Kong and London
Opportunities
Interest Rate Hikes- massive cash balances will
significantly boost profitability with no new
associated costs when rates rise
ETF Industry Growth- Schwab is an ETF industry
leader
Aging Populace- aging population will require more
retirement advisory and management
Threats
Presidential Election- anti-banking policies enacted
by populist candidates
Other Firms- competition for talent is fierce,
compensation costs may rise in order to attract and
keep personnel

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Investment Thesis
We rate SCHW a buy. There are multiple catalysts justifying our view that the stock has
massive upside. Ignoring all other growth within the company, Schwab’s earnings could
potentially jump by 50% as interest rates rise. The company is a historic outperformer with
an extremely strong culture of excellence and a very positive reputation. Additionally,
Schwab is at the forefront of the asset management industry’s movement towards ETFs.
For these reasons, we believe Schwab is a good fit in the financial sector, allowing the fund
to maintain a high growth position in the asset management industry.
Sources
Bloomberg Terminal
Nasdaq.com
S&P Capital IQ Report
Schwab 10K
YCharts