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Why is an Earnings Beat Less Likely for Schwab (SCHW) in Q2?

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The Charles Schwab Corporation (SCHW - Free Report) is scheduled to report second-quarter 2018 results on Jul 17, before the market opens. Its revenues and earnings are projected to grow year over year.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Revenue growth, significant rise in total client assets and new brokerage accounts were among the positives. However, higher expenses remained a headwind.

In fact, 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 2.9%.

However, activities of Schwab during the second quarter were inadequate to win analysts’ confidence. Thus, over the past 30 days, its Zacks Consensus Estimate for the to-be-reported quarter’s earnings was revised 1.7% downward to 58 cents. Nevertheless, the figure reflects a year-over-year improvement of 48.7%.

Notably, Schwab’s fundamental strength has helped its shares gain 17.9% in the past year, outperforming 10.8% growth recorded by the industry.

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

Before we take a look at what our quantitative model predicts, let’s check the factors that are likely to impact Q2 results.

Factors to Influence Q2 Results

After an impressive first quarter, in terms of significant market volatility, client activity returned to normalized levels in the second quarter. Nevertheless, Schwab opened 141,000 and 122,000 new brokerage accounts in April and May, respectively, indicating that investors were somewhat interested in entering the market. Also, the company’s efforts toward lowering trading fees should have helped in adding more brokerage accounts during the quarter. The Zacks Consensus Estimate for active brokerage accounts for the second quarter is 11,181, which reflects a year-over-year improvement of 6.6%.

Thus, despite a sequential slowdown in market volatility in the second quarter, Schwab’s trading revenues are expected to witness a modest improvement, supported by decent growth in brokerage accounts.

Further, Schwab witnessed a rise in total client assets and average interest-earning assets in April and May, 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 to-be-reported quarter is $3.4 trillion, reflecting year-over-year growth of 11.5%. Also, the Zacks Consensus Estimate for average interest earning assets for the quarter is $249 billion, which reflects growth of 15.3% year over year. Hence, higher assets, along with an 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 is expected to support overall revenue growth in the quarter. The Zacks Consensus Estimate for revenues for the to-be-reported quarter is $2.50 billion, which reflects year-over-year growth of 17.2%.

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

Now, let’s see what our quantitative model predicts.

According to our quantitative model, chances of Schwab beating the Zacks Consensus Estimate in the second quarter are low. This is because it does not have 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 -2.29%.

Zacks Rank: Schwab currently has a Zacks Rank #3. While this increases the predictive power of ESP, we also need a positive ESP to be confident of an earnings beat.

Stocks Worth a Look

Here are a few 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 Jul 17. It has an Earnings ESP of +1.60% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Blackstone Group L.P. (BX - Free Report) is slated to release results on Jul 19. It has an Earnings ESP of +5.40% and carries a Zacks Rank #3.

KeyCorp (KEY - Free Report) has an Earnings ESP of +0.20% and carries a Zacks Rank of 3. The company is also slated to release results on Jul 19.

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