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Compass Point upgrades Schwab over TD Ameritrade deal

Compass Point Research & Trading LLC analyst Chris Allen upgraded Charles Schwab Corp. to "buy" in line with ratings for the company's pending merger of TD Ameritrade Holding Corp.

Allen wrote that he sees a compelling long-term margin expansion or earnings growth story for the San Francisco-based company, with the deals with TD Ameritrade and USAA Investment Management Co. expected to drive EPS accretion in 2021 and beyond.

Assuming both transactions close in the third quarter of 2020, the analyst expects the TD Ameritrade deal to be 13% and 18% accretive on a cash basis in the second year and third year post-closing, respectively. For fiscal years 2022 and 2023, he sees EPS accretion of 16% and 18%, respectively. This excludes a 4% revenue attrition for TD Ameritrade.

The analyst noted that while he expects some level of attrition from the overlap of registered investment advisers' customers, he expects the companies to "take a thoughtful approach in combining the best attributes of both platforms from a tech, products, and customer service perspective moving forward."

Allen gave Charles Schwab a price target of $60. His EPS estimates are $2.70 for 2019 and $2.56 for 2020.