Goldman Sachs upgrades Charles Schwab on strong earnings growth

Investing.com -- Goldman Sachs has upgraded Charles Schwab Corp (NYSE: SCHW) to "Buy" from "Neutral" driven by strong earnings growth potential.

Brokerage set a price target of $100 for the stock, implying a more than 25% increase from the current stock price.

Goldman Sachs expects Schwab's earnings per share to grow at an average annual rate of 25% through 2027.

This compares favorably to the 15% average growth expected for other brokers, and 10% for the broader financial sector, as measured by the XLF exchange-traded fund.

The upgrade was also driven by stabilization of Schwab's balance sheet, which is expected to boost net interest income (NII) by approximately 16% annually through 2027.

Goldman Sachs also noted that Schwab's management has taken steps to reduce the risks associated with potentially lower short-term interest rates.

Additionally, Goldman Sachs highlighted Schwab's rapidly growing excess capital, which is projected to reach around $20 billion by the end of 2027.

This could enable Schwab to resume significant share repurchases, further driving up EPS. The firm also sees signs of sustained organic growth, returning to Schwab's target range of 5% to 7%.

Goldman Sachs's analysis suggests that Schwab's stock is currently undervalued. It is trading at a price-to-earnings (P/E) ratio of 17 times next-twelve-months (NTM) consensus earnings, which is in line with its three-year average.

However, Goldman Sachs points out that Schwab's expected EPS growth is significantly above normal.

The $100 price target is based on a P/E ratio of 17 times the estimated 2027 EPS, discounted back one year.

Goldman Sachs's updated EPS estimates for 2025-2027 are $4.44, $5.03, and $6.29, respectively, which are above current market consensus.

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