A Side-by-side Analysis of The Charles Schwab Corporation (SCHW) and E*TRADE Financial Corporation (ETFC)

The Charles Schwab Corporation (NYSE:SCHW) shares are up more than 4.26% this year and recently increased 0.41% or $0.22 to settle at $53.56. E*TRADE Financial Corporation (NASDAQ:ETFC), on the other hand, is up 6.29% year to date as of 01/10/2018. It currently trades at $52.69 and has returned 4.09% during the past week.

The Charles Schwab Corporation (NYSE:SCHW) and E*TRADE Financial Corporation (NASDAQ:ETFC) are the two most active stocks in the Investment Brokerage – National industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.


One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect SCHW to grow earnings at a 20.78% annual rate over the next 5 years. Comparatively, ETFC is expected to grow at a 16.86% annual rate. All else equal, SCHW’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 61.53% for E*TRADE Financial Corporation (ETFC). SCHW’s ROI is 1.00% while ETFC has a ROI of 1.40%. The interpretation is that ETFC’s business generates a higher return on investment than SCHW’s.

Cash Flow 

If there’s one thing investors care more about than earnings, it’s cash flow. SCHW’s free cash flow (“FCF”) per share for the trailing twelve months was -1.13. Comparatively, ETFC’s free cash flow per share was +0.93. On a percent-of-sales basis, SCHW’s free cash flow was -20.25% while ETFC converted 12.3% of its revenues into cash flow. This means that, for a given level of sales, ETFC is able to generate more free cash flow for investors.

Financial Risk

SCHW’s debt-to-equity ratio is 11.38 versus a D/E of 6.90 for ETFC. SCHW is therefore the more solvent of the two companies, and has lower financial risk.


SCHW trades at a forward P/E of 25.11, a P/B of 4.71, and a P/S of 8.29, compared to a forward P/E of 18.63, a P/B of 2.30, and a P/S of 6.05 for ETFC. SCHW is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. SCHW is currently priced at a -0.17% to its one-year price target of 53.65. Comparatively, ETFC is -1.92% relative to its price target of 53.72. This suggests that ETFC is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.10 for SCHW and 2.10 for ETFC, which implies that analysts are equally bullish on their outlook for the two stocks.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. SCHW has a beta of 1.68 and ETFC’s beta is 1.36. ETFC’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.SCHW has a short ratio of 4.15 compared to a short interest of 2.69 for ETFC. This implies that the market is currently less bearish on the outlook for ETFC.


E*TRADE Financial Corporation (NASDAQ:ETFC) beats The Charles Schwab Corporation (NYSE:SCHW) on a total of 10 of the 14 factors compared between the two stocks. ETFC is growing fastly, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, ETFC is the cheaper of the two stocks on an earnings, book value and sales basis, ETFC is more undervalued relative to its price target. Finally, ETFC has better sentiment signals based on short interest.

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