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Why Is Schwab (SCHW) Down 3.5% Since Last Earnings Report?

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It has been about a month since the last earnings report for Schwab (SCHW - Free Report) . Shares have lost about 3.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Schwab due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Schwab Beats Q4 Earnings & Revenue Estimates, Costs Up

Charles Schwab’s fourth-quarter earnings of 65 cents per share beat the Zacks Consensus Estimate of 64 cents. Also, earnings surged 59% from the prior-year quarter.

Revenue growth (driven by a rise in interest income and trading revenues) and absence of fee waivers aided the results. However, higher expenses remained a concern. Further, the quarter recorded a fall in total client assets.

Net income available to common shareholders was $885 million, jumping 61% year over year.

For 2018, earnings per share of $2.45 surpassed the Zacks Consensus Estimate of $2.43. Also, earnings surged 49% from the prior year. Net income available to common shareholders was $3.3 billion, up 53% from 2017.
 

Revenue Growth Offset by Rise in Expenses

Net revenues were $2.67 billion, up 19% year over year. The rise was supported by net interest revenues (up 42%), trading revenues (up 34%) and other revenues (up 5%), partially offset by 13% fall in asset management and administration fees. The reported figure surpassed the Zacks Consensus Estimate of $2.63 billion.

In 2018, net revenues were $10.13 billion, up 18% year over year. The reported figure beat the Zacks Consensus Estimate of $10.10 billion.

Total non-interest expenses increased 13% year over year to $1.46 billion. All expense components, except regulatory fees and assessments costs, increased on a year-over-year basis.

Fee waivers were nil in the reported quarter.

Pre-tax profit margin improved to 45.3% from 42.5% recorded last year.

At the end of the fourth quarter, Schwab’s average interest-earning assets grew 20% year over year to $268.3 billion.

Annualized return on equity as of Dec 31, 2018, came in at 20%, up from 14% in the year-ago quarter.

Other Business Developments

As of Dec 31, 2018, Schwab had total client assets of $3.25 trillion (down 3% year over year). Also, net new assets — brought by new and existing clients — were $55.3 billion, down 29% from the prior-year quarter.

Schwab added 380,000 new brokerage accounts in the reported quarter. As of Dec 31, 2018, the company had 11.6 million active brokerage accounts, 1.3 million banking accounts and 1.7 million corporate retirement plan participants.

Outlook

Management expects revenues to grow 7-11% in 2019 driven by the assumptions of one interest rate hike in June, S&P 500 appreciates 6.5% from mid-January level and DARTs rise approximately 5% year over year.

Further, GAAP expenses are projected to increase 6-7% in 2019, given significant investments to upgrade technology and support business expansion. Notably, over the long-term, expenses are expected to rise in the low-to-mid single digits rate.

Pre-tax margin is anticipated to be 45% or more in 2019.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 5.13% due to these changes.

VGM Scores

Currently, Schwab has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Schwab has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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