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Will Lower Rates, Volatility Hurt Schwab's (SCHW) Q2 Earnings?

Zacks Equity Research

Charles Schwab SCHW is scheduled to report second-quarter 2019 results on Jul 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 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 as its earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average positive surprise being 2.8%.

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 second 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 has declined 2.9% to 66 cents. Nevertheless, the figure indicates an improvement of 10% from the year-ago reported number.

The Zacks Consensus Estimate for sales for the to-be-reported quarter is pegged at $2.69 billion, which suggests an increase of 8.3% from the year-ago reported figure.

Schwab’s shares have lost nearly 7.6% in the past six months against 1.1% growth recorded by the industry.

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

Factors to Influence Q2 Results

During the second quarter, overall market volatility remained low but performance of the equity markets was decent.

Schwab opened 147,000 and 12,000 new brokerage accounts in April and May, respectively, indicating that investors were somewhat interested in entering the market. Moreover, the consensus estimate for active brokerage accounts of 11,957 for the second quarter suggests an improvement of nearly 6.7% from the year-ago reported figure.

Thus, despite lower volatility, Schwab’s trading revenues are not expected to witness a drastic decline in the second quarter.

Moreover, the company is expected to witness a year-over-year 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 $3.7 trillion, indicating growth of 8.7% from the year-ago reported number. Moreover, the consensus estimate for average interest-earning assets is pegged at $266 billion, which implies growth of 9% from the year-ago reported figure. However, despite growth in assets, because of increased chances of a rate cut (as indicated by the statement issued at the end of two-day FOMC meeting in June), Schwab’s net interest revenues are not expected to witness significant improvement during the quarter amid flattening of the yield curve.

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

Earnings Whispers

According to our quantitative model, chances of Schwab beating the Zacks Consensus Estimate in the second quarter are low. This is because it does not have 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 -1.40%.

Zacks Rank: Schwab currently carries a Zacks Rank #5 (Strong Sell), which further decreases the chances of an earnings beat.

Stocks Worth a Look

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

TD Ameritrade Holding Corporation AMTD is slated to release results on Jul 22. It has an Earnings ESP of +0.04% and currently carries a Zacks Rank #3.

Franklin Resources, Inc. BEN has an Earnings ESP of +0.53% and carries a Zacks Rank #2 (Buy) at present. The company is slated to release results on Jul 30.

Ares Capital Corporation ARCC is expected to release results on Jul 30. It presently has an Earnings ESP of +1.02% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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