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On May 30, 2013, we reiterated our long-term recommendation on The Charles Schwab Corporation (SCHW - Analyst Report) at Neutral. Our decision rests on the synergies from its strategic acquisitions and a stable capital position. However, we remain concerned about the company’s low trading activities and reduced interest-rate yields.

Why the Neutral Stance?

Schwab’s first-quarter 2013 earnings came in at $0.15 per share, in line with the year-ago earnings. Results were primarily driven by top-line growth, partially offset by higher operating expenses and a rise in provision for loan losses. Moreover, improvement in client assets and a rise in new brokerage accounts were the tailwinds for the quarter.

The Zacks Consensus Estimate for 2013 remained stable at $0.74 per share over the last 60 days. However, for 2014, the Zacks Consensus Estimate went down by 2.3% to $0.85 per share over the same time frame. Hence, the company currently has a Zacks Rank #3 (Hold).

Schwab has been actively engaged in making acquisitions over the past few years. Owing to this, the company’s revenue base has been well diversified, thus proving to be a major strength.

Moreover, Schwab has been making significant effort to lessen its dependency on interest rates. The company has launched initiatives comprising Schwab Index Advantage and Independent Branch Services. This is expected to help Schwab augment its revenue going forward, with or without a Fed rate hike.

However, Schwab’s business model is highly sensitive to interest rates. Low rates have been a drag on its revenues, compelling the company to waive fees, which it charges its clients for managing funds.

Moreover, Schwab has been experiencing pressure on Daily Average Trades (DATs) as a result of the disengagement of retail traders.  

Other Brokerage Firms to consider

Some better performing brokerage firms include Ladenburg Thalmann Financial Services Inc. (LTS - Snapshot Report) and LPL Financial Holdings Inc. (LPLA - Snapshot Report) with a Zacks Rank #1 (Strong Buy) and GAIN Capital Holdings, Inc. (GCAP - Snapshot Report) with a Zacks Rank #2 (Buy).

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