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Inorganic Growth Efforts Aid Schwab (SCHW) Amid Cost Concerns

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Charles Schwab’s (SCHW - Free Report) inorganic growth efforts and initiatives to augment trading revenues will likely keep boosting profitability. The company’s capital deployment plan reflects a strong balance sheet position, through which it will keep enhancing shareholder value.

However, despite the expected rate hikes in 2022, relatively lower interest rates might keep hurting margins in the near term. Elevated operating expenses might hamper the company's bottom-line growth.

Analysts do not seem very optimistic regarding the company’s earnings growth potential. The Zacks Consensus Estimate for SCHW’s current-year earnings has been revised 7.4% lower over the past 30 days. Thus, the company currently carries a Zacks Rank #3 (Hold).

In the past three months, shares of Schwab have lost 23.9% compared with the 18% decline recorded by the industry.

 

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Looking at its fundamentals, while Schwab’s trading revenues declined in 2019 and the first quarter of 2022, it witnessed a compound annual growth rate (CAGR) of 58.7% over the last five years (2017-2021). The company continues to undertake initiatives to enhance trading revenues, including lowering its basic online equity and ETF trade commissions to zero and reducing fees for the Schwab market cap-weighted index mutual funds.

Also, it launched Schwab Stock Slices, through which investors will be able to own shares of any company in the S&P 500 Index starting at $5 each, even though these shares cost more.

These efforts, aimed at building client base, along with the acquisition of TD Ameritrade (October 2021), are likely to lead to further improvement in trading income.

Moreover, Schwab continues to benefit from the aggressive efforts undertaken to increase client base in advisory solutions. Its advice solution revenues saw a four-year (2018-2021) CAGR of 20.5%, with the uptrend continuing in first-quarter 2022.

Notably, the acquisitions of USAA’s Investment Management Company, Wasmer, Schroeder & Company, LLC, and the buyout of Motif’s technology and intellectual property have further strengthened Schwab's position and helped diversify revenues.

Despite the company lowering fees on certain advice solution products, revenues from the same increased as average client asset balances improved. Driven by these efforts, total client assets witnessed a CAGR of 35.8% over the four-year period ended 2021, with the upward momentum continuing in the first three months of 2022.

However, given the relatively low interest rate environment, Schwab’s net interest margin (NIM) has been under pressure for the past few quarters. NIM declined from 2.41% in 2019 to 1.45% in 2021. The downward trend continued in first-quarter 2022. Despite the hike in interest rates in March and May 2022, along with expectations of several more this year, the company’s margins might continue to be under pressure for some time in the near term because of relatively lower rates hurting top-line growth.

Further, SCHW’s expenses witnessed a CAGR of 19.2% over the last six years (2016-2021) mainly due to a rise in compensation and benefit costs, and acquisitions. The upward trend persisted in first-quarter 2022. An increase in costs associated with compensation and regulatory spending as well as strategic buyouts are expected to keep total expenses elevated in the upcoming quarters.

Stocks to Consider

A couple of better-ranked stocks from the finance space are Gladstone Capital Corporation (GLAD - Free Report) and Main Street Capital Corporation (MAIN - Free Report) . GLAD currently sports a Zacks Rank #1 (Strong Buy), while MAIN carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The consensus estimate for Gladstone Capital’s current fiscal year’s earnings has been revised 8.1% upward over the past 60 days. Over the past year, GLAD’s share price has rallied 4.6%.

Main Street Capital’s current-year earnings estimates have been revised 1.4% upward over the past 60 days. MAIN’s shares have lost 11.1% over the past year.


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