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Can Higher Client Activity Aid Schwab (SCHW) in Q4 Earnings?


Charles Schwab SCHW is scheduled to report fourth-quarter and 2019 results on Jan 16, before the market opens. Its quarterly revenues and earnings are expected to have declined on a year-over-year basis.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Revenue growth and increase in total client assets aided results. However, higher expenses and lower trading revenues acted as headwinds.

Schwab has an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in three and met in one of the trailing four quarters, with a positive surprise of 5%, on average.

The Charles Schwab Corporation Price and EPS Surprise

The Charles Schwab Corporation Price and EPS Surprise

The Charles Schwab Corporation price-eps-surprise | The Charles Schwab Corporation Quote

However, activities of the company during the fourth quarter failed to encourage analysts to revise earnings estimates upward. Over the past 30 days, the Zacks Consensus Estimate for its earnings for the to-be-reported quarter has been unchanged at 64 cents. The figure indicates a decline of 1.5% from the year-ago reported number.

The Zacks Consensus Estimate for fourth-quarter sales is pegged at $2.59 billion, which suggests a 3.1% decline from the year-ago quarter’s reported figure.

Notably, during the fourth quarter, the company inked an all-stock deal to acquire TD Ameritrade Holding for roughly $26 billion. This is expected to create a behemoth in online brokerage space, with combined client assets worth more than $5 trillion, serving nearly 24 million brokerage accounts. The deal is expected to close in the second half of 2020.

Before we take a look at what our quantitative model predicts for the fourth quarter, let’s check the factors that are likely to have impacted Schwab’s performance.

Key Factors to Note:

The fourth quarter witnessed a rise in client activity. Moreover, the performance of the equity markets was good enough.

Schwab opened 142,000 and 127,000 new brokerage accounts in October and November, respectively, indicating that investors were interested in entering the market. Moreover, the Zacks Consensus Estimate for active brokerage accounts of 12,257 for the fourth quarter suggests an improvement of 1.1% from the previous quarter’s reported number.

Thus, driven by relatively higher market volatility, Schwab’s trading revenues are likely to have improved in the fourth quarter.

However, after the company lowered its U.S. stock, ETF and options online trading commissions to $0, effective October 2019, its CFO Peter Crawford stated that the move would have a 3-4% adverse impact on quarterly net revenues.

Notably, Schwab is expected to have witnessed an increase in total client assets and average interest-earning assets in the to-be-reported quarter.

The Zacks Consensus Estimate for total client assets is pegged at $3.9 trillion, indicating growth of 3.8% from the prior quarter’s reported number. Moreover, the consensus estimate for average interest-earning assets is pegged at $270 billion, which suggests growth of 1.9% sequentially. Despite growth in assets, Schwab’s net interest revenues are not expected to have witnessed improvement in the quarter because of lower interest rates.

The company’s operating expenses have remained elevated over the past few quarters. Moreover, because of higher compensation and benefits costs, overall expenses are expected to have remained high in the fourth quarter.

Management expects expenses to increase 5% in 2019, given significant investments to upgrade technology and support business expansion.

What the Zacks Model Unveils

According to our quantitative model, chances of Schwab beating the Zacks Consensus Estimate in the fourth quarter are high. This is because it has the right combination of the two key ingredients — a positive Earnings ESP and 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.

Earnings ESP: The Earnings ESP for Schwab is +0.26%.

Zacks Rank: The company currently carries a Zacks Rank #3.

Other Stocks Worth a Look

Here are some other finance stocks that you may want to consider as these too have the right combination of elements to post an earnings beat in their upcoming releases, per our model.

TD Ameritrade Holding Corporation AMTD has an Earnings ESP of +1.85% and a Zacks Rank #3 at present. The company is slated to release results on Jan 21.

Associated Banc-Corp ASB is slated to release results on Jan 23. It presently has an Earnings ESP of +1.10% and a Zacks Rank #3.

Federated Investors, Inc FII is slated to release results on Jan 30. It currently has an Earnings ESP of +2.13% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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