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Client Activity, High Rates to Aid Schwab (SCHW) Q4 Earnings

Zacks Equity Research

The Charles Schwab Corporation SCHW is scheduled to report fourth-quarter and 2018 results on Jan 16, before the market opens. Its revenues and earnings for the to-be-reported quarter 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 surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average positive surprise being 3.6%.

The Charles Schwab Corporation Price and EPS Surprise
 

The Charles Schwab Corporation Price and EPS Surprise | The Charles Schwab Corporation Quote

However, activities of Schwab during the fourth quarter failed to encourage analysts to revise earnings estimates upward. Over the past 30 days, its Zacks Consensus Estimate for earnings for the to-be-reported quarter remained unchanged at 64 cents. Nevertheless, the figure reflects a year-over-year improvement of 45.5%.

Notably, Schwab’s shares have lost 21.1% in the past year compared with 24.4% decline recorded by the industry.

Will the price performance improve post fourth-quarter earnings release? Let’s see how things are shaping up.

Factors to Influence Q4 Results

Similar to the first nine months of 2018, the fourth quarter witnessed substantial market volatility. Notably, Schwab opened 133,000 and 115,000 new brokerage accounts in October and November, respectively, indicating that investors were interested in entering the market. Further, 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 fourth quarter of 11,607 reflects a year-over-year improvement of 7.9%.

Therefore, driven by growth in brokerage accounts, higher client activity as well as significant volatility, Schwab’s trading revenues are expected to witness some improvement during the to-be-reported quarter.

Further, Schwab witnessed rise in total client assets and average interest-earning assets in October and November, on a year-over-year basis. This will 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 pegged at $3.6 trillion, reflecting year-over-year growth of 5.8%. Moreover, the consensus estimate for average interest earning assets for the quarter is $269 billion, which shows growth of 20% year over year. Hence, higher assets, along with an improvement in the rate scenario, will likely 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 under review. The Zacks Consensus Estimate for sales for the to-be-reported quarter is pegged at $2.64 billion, which reflects year-over-year increase of 17.9%.

However, the company’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 fourth 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 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 +0.65%.

Zacks Rank: Schwab currently has a Zacks Rank #3, which increases the predictive power of ESP.

Other Stocks Worth a Look

Here are a few other finance stocks that you may want to consider as these also have the right combination of elements to post an earnings beat this quarter, according to our model.

U.S. Bancorp USB is slated to release results on Jan 16. It has an Earnings ESP of +0.15% and currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SunTrust Banks, Inc. STI is scheduled to release results on Jan 18. It has an Earnings ESP of +0.07% and a Zacks Rank #3.

Zions Bancorporation, National Association ZION has an Earnings ESP of +1.09% and carries a Zacks Rank of 3. The company is slated to release results on Jan 22.

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