Why Is Charles Schwab (SCHW) Up 11% Since Its Last Earnings Report?

A month has gone by since the last earnings report for The Charles Schwab Corporation SCHW. Shares have added about 11% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is SCHW due for a pullback? 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 drivers.

Schwab Beats Q1 Earnings as Trading Activity Improves

Schwab’s first-quarter 2018 earnings of 55 cents per share surpassed the Zacks Consensus Estimate by a penny. Also, earnings surged 41% from the prior-year quarter.

Revenue growth (driven by a rise in interest income and trading revenues) and absence of fee waivers were among the positives. Further, there was an impressive rise in total client assets and new brokerage accounts. However, higher expenses remained a headwind.

Net income available to common shareholders was $746 million, up 42% year over year.

Revenue Improvement Offset by Expense Rise

Net revenues were $2.40 billion, climbing 15% year over year. Growth was supported by asset management and administration fees (up 3%), net interest revenues (up 26%), trading revenues (up 5%) and other revenues (up 26%). The reported figure outpaced the Zacks Consensus Estimate of $2.37 billion.

Total non-interest expenses rose 13% year over year to $1.40 billion. All expense components increased on a year-over-year basis.

Fee waivers were nil in the reported quarter.

Pre-tax profit margin improved to 41.8% from 40.5% recorded last year.

At the end of the first quarter, Schwab’s average interest-earning assets grew 10% year over year to $238.5 billion.

Annualized return on equity as of Mar 31, 2018, came in at 18%, up from 15% in the year-ago quarter.

Other Business Developments

As of Mar 31, 2018, Schwab had total client assets of $3.31 trillion (up 13% year over year). Also, net new assets — brought by new and existing clients — were outflows of $18.8 billion against inflows of $38.9 billion in the prior-year quarter.

In addition, Schwab added 443,000 new brokerage accounts in the reported quarter. As of Mar 31, 2018, the company had a total of 11 million active brokerage accounts, 1.2 million banking accounts and 1.6 million corporate retirement plan participants.

Outlook

On the assumptions of a 25 basis points (bps) rate hike in June, S&P appreciating 6.5%, average 10-year Treasury to stay at 2.55% and DARTs slightly up year over year, management expects revenue growth to be in low double-digits in 2018, the gap between revenue and expense growth to be in the range of 100-200 bps and earn a pre-tax profit margin of at least 43%.

If there are three rate hikes in the year, revenue growth for 2018 is expected to be between 13-15%, the gap between revenue and expense growth is expected to be in the range of 200-400 bps and pre-tax profit margin is expected to be 43-45%.

The company expects net interest margin to come between 215-220 bps in 2018, given the benefit of the March rate hike.

Management expects 2018 effective tax rate to be around 23-24%.

The company expects improving client activity and bulk transfers will drive balance sheet growth by at least 15% in 2018. Moreover, in the second quarter of 2018, the company is expected to cross $250 billion threshold in assets.

The company projects its Tier 1 Leverage ratio to be in the range of 6.75-7% by the end of 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been five revisions higher for the current quarter compared to three lower.

The Charles Schwab Corporation Price and Consensus

The Charles Schwab Corporation Price and Consensus | The Charles Schwab Corporation Quote

VGM Scores

At this time, SCHW has an average Growth Score of C, however its Momentum is doing a bit better with a B. 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for momentum investors than growth investors.

Outlook

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

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