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Why Is Schwab (SCHW) Down 11.2% 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 11.2% 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 Q2 Earnings & Revenues Match, Expenses Rise

Charles Schwab’s second-quarter 2019 earnings of 66 cents per share came in line with the Zacks Consensus Estimate. Also, the bottom line increased 10% from the prior-year quarter.

Revenue growth (driven by a rise in interest income) and an increase in total client assets aided the results. However, higher expenses and lower trading revenues acted as headwinds.

Net income available to common shareholders was $887 million, increasing 9% year over year.

Revenue Growth Offset by Rise in Expenses

Net revenues were $2.68 billion, up 8% year over year. The rise was supported by net interest revenues (up 14%) and other revenues (up 32%), partially offset by 3% fall in both asset management and administration fees, and trading revenues. The reported figure was marginally below the Zacks Consensus Estimate.

Total non-interest expenses increased 7% year over year to $1.45 billion. All expense components, except regulatory fees and assessments costs, and advertising and market development expenses, increased on a year-over-year basis.

Pre-tax profit margin improved to 46.1% from 45.5%.

At the end of the second quarter, Schwab’s average interest-earning assets grew 9% year over year to $265.7 billion.

Annualized return on equity as of Jun 30, 2019, came in at 19%, stable year over year.

Other Business Developments

As of Jun 30, 2019, Schwab had total client assets of $3.70 trillion (up 9% year over year). Also, net new assets — brought by new and existing clients — were $37.2 billion, down 15% from the prior-year quarter.

Schwab added 386,000 new brokerage accounts in the reported quarter. As of Jun 30, 2019, the company had 12 million active brokerage accounts, 1.3 million banking accounts and 1.7 million corporate retirement plan participants.

Share Repurchase Update

Schwab repurchased 29.1 million shares for $1.2 billion during the reported quarter.

Outlook

Management expects revenues to grow 5-7% in 2019 on the assumptions of one interest rate cut in July. It also projects the S&P 500 to appreciate 6.5% from June-end level, average 10-year Treasury at 2.05%, balance sheet to be down 7% or rise 1% and DARTs to increase nearly 1% year over year.

Further, GAAP expenses are projected to increase 5-6% 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 at least 45% in 2019.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

Currently, Schwab has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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