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Why an Earnings Beat is Likely for Schwab (SCHW) in Q1?

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The Charles Schwab Corporation (SCHW - Free Report) is scheduled to report first-quarter 2018 results on Apr 16, before market open. Its revenues and earnings are projected to grow year over year.

Last quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Revenue growth, no provisions and a significant rise in total client assets, and new brokerage accounts were among the positives. However, higher expenses and a decrease in trading revenues remained headwinds.

Moreover, the company has an impressive earnings surprise history as its earnings did not lag the Zacks Consensus Estimate in any of the trailing four quarters. It delivered an average positive surprise of nearly 3.8%.

However, activities of Schwab during the first quarter were inadequate to win analysts’ confidence. Thus, over the last 30 days, its Zacks Consensus Estimate for the quarter’s earnings remained unchanged at 53 cents. Nevertheless, it reflects a year-over-year improvement of 35.9%.

Notably, Schwab’s fundamental strength has helped its shares gain 35.7% in the past year, outperforming 31.2% growth recorded by the industry.

Will the stock’s rally continue post first-quarter earnings release? Let’s see how things are shaping up.

A Likely Positive Surprise?

According to our quantitative model, it is quite likely that Schwab will be able to beat the Zacks Consensus Estimate in the first quarter. This is because it has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — which is required to be confident of an earnings surprise call.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP for Schwab is +0.31%.

Zacks Rank: Schwab currently has a Zacks Rank #3, which increases the predictive power of ESP.

Factors to Influence Q1 Results

Overall trading activities remained strong during the quarter, driven by significant market volatility, specifically in the months of February and March. Notably, Schwab opened 165,000 and 138,000 new brokerage accounts in January and February, respectively, indicating that investors were interested in entering the market. Also, the company’s efforts toward lowering trading fees should have helped in adding more brokerage accounts. The Zacks Consensus Estimate for active brokerage accounts for the first quarter is 10,936, which reflects year-over-year improvement of 6%.

Thus, with growth in brokerage accounts, Schwab’s trading revenues might have witnessed improvement in the quarter.

Further, Schwab witnessed a rise in total client assets and average interest-earning assets in January and February on a year-over-year basis. This should reflect in the company’s results for the entire quarter.

In fact, the Zacks Consensus Estimate for total client assets for the quarter is $3.5 trillion, reflecting year-over-year growth of 18.8%. Also, the Zacks Consensus Estimate for average interest earning assets for the quarter is $233 billion, which is expected to grow 7.4% year over year. Hence, higher assets, along with improvement in the rate scenario, should help Schwab experience higher net interest revenues during the quarter.

Improvement in the two most important components of Schwab’s revenues should support overall revenue growth in the quarter. The Zacks Consensus Estimate for revenues for the to-be-reported quarter is $2.34 billion, which reflects growth of 12.7% year over year.

However, Schwab’s operating expenses have remained elevated for the past few quarters. Moreover, because of higher compensation and benefits cost, overall expenses are expected to remain high in the first quarter.

Other Stocks Worth a Look

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

Comerica Incorporated (CMA - Free Report) is scheduled to release results on Apr 17. It has an Earnings ESP of +0.93% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BB&T Corporation (BBT - Free Report) is slated to release results on Apr 19. It has an Earnings ESP of +1.37% and carries a Zacks Rank #3.

The Bank of New York Mellon Corporation (BK - Free Report) has an Earnings ESP of +1.81% and carries a Zacks Rank of 3. The company is also slated to release results on Apr 19.

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