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Schwab (SCHW) Q2 Earnings: What's in Store for the Stock?

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The Charles Schwab Corporation (SCHW - Free Report) is scheduled to report its second-quarter 2016 results on Jul 18, before the market opens.

This San Francisco-based investment broker delivered in-line earnings in the last quarter. Revenue growth and benefits from provisions were offset by higher expenses.

Notably, Schwab has a decent earnings surprise history, as evident from the chart below:

SCHWAB(CHAS) Price and EPS Surprise

SCHWAB(CHAS) Price and EPS Surprise | SCHWAB(CHAS) Quote

Will Schwab be able to surpass estimates this time around? Or will a challenging backdrop hurt its financials this earnings season? Let’s see how things have shaped up for this announcement.

Factors to Influence Q2 Results

Mounting operating expenses will drag down Schwab’s bottom line as the company continues to incur costs related to compensation and regulatory spending. Further during its interim business update in April, management announced its intention to significantly ramp-up the project and marketing spending as well as increase the client service expenses, corresponding to revenue growth.

Additionally, the Federal Reserve’s dovish stance so far this year may dampen the benefits from the interest rate hike in Dec 2015. Though the company is undertaking initiatives to reduce its sensitivity to interest rate, the absence of near-term improvements in the rate environment will hurt its revenue growth.

Nonetheless, substantial volatility in the equity markets during the quarter should drive up Schwab’s trading revenue. Also, the company opened 103,000 and 83,000 new brokerage accounts in April and May, respectively (based on the monthly reports released by the company). While the number of new brokerage accounts opened in May declined from the prior month, the overall trend indicates investors’ interest in entering the market.

Further, Schwab witnessed an increase in average interest-earning assets in both the months, which should boost asset management fees as well as net interest revenue during the quarter.

Moreover, the company projected net money fund revenues in second quarter 2016 to grow roughly $20–$25 million sequentially, provided the balances and rates stay near the current levels.

Notably, Schwab’s activities during the quarter were insufficient to win analysts’ confidence. As a result, the Zacks Consensus Estimate remained stable at 30 cents per share in the past 7 days.

Earnings Whispers

Our proven model conclusively shows that chances of Schwab beating the Zacks Consensus Estimate in the second quarter are very low. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #3 (Hold) or better for this to happen. Unfortunately, this is not the case here, as elaborated below.

Zacks ESP: The Earnings ESP for Schwab is 0.00%. This is because the Most Accurate Estimate of 30 cents per share is on par with the Zacks Consensus Estimate.

Zacks Rank: Schwab’s Zacks Rank #5 (Strong Sell) further decreases the predictive power of ESP. Note that we caution against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into an earnings announcement.

Stocks That Warrant a Look

Here are a few finance stocks that you may want to consider, as they have the right combination of elements to post an earnings beat this quarter, according to our model.

Comerica Incorporated (CMA - Free Report) has an Earnings ESP of +1.47% and a Zacks Rank #3. It is scheduled to report results on Jul 19.

Regions Financial Corporation (RF - Free Report) has an Earnings ESP of +5.00% and a Zacks Rank #3. It is slated to report on Jul 19.

Federated Investors, Inc. (FII - Free Report) has an Earnings ESP of +2.13% and a Zacks Rank #3. It is slated to report results on Jul 28.

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