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Volatility, TD Ameritrade Buyout to Aid Schwab (SCHW) Q4 Earnings

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Zacks Equity Research
·5 min read
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Charles Schwab SCHW is scheduled to report fourth-quarter and 2020 results on Jan 19, before market open. Driven by upbeat markets and the TD Ameritrade buyout, the company’s revenues and earnings in the quarter are expected to have improved on a year-over-year basis.

In third-quarter 2020, Schwab’s earnings surpassed the Zacks Consensus Estimate. Solid client asset balances and a rise in new brokerage accounts amid the coronavirus-induced volatile markets supported results. However, lower revenues and an increase in expenses were headwinds.

The company does not have an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in only one of the trailing four quarters.

The Charles Schwab Corporation Price and EPS Surprise


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

Nevertheless, activities of the company during the fourth quarter encouraged analysts to revise earnings estimates upward. Over the past seven days, the Zacks Consensus Estimate for fourth-quarter earnings has been revised 2.9% upward to 70 cents. Also, the figure indicates an increase of 11.1% from the year-ago reported number.

Notably, compared to the third quarter, management expects a 25-35% accretion in adjusted earnings for the to-be-reported quarter, resulting from the TD Ameritrade integration.

The Zacks Consensus Estimate for sales is pegged at $4.13 billion, which suggests a 58.6% rise from the year-ago quarter’s reported figure.

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

Key Factors at Play

Similar to the first nine months of 2020, the fourth quarter witnessed a rise in market volatility. The lingering concerns related to the coronavirus pandemic along with other major developments like the vaccine breakthroughs and the U.S. Presidential elections resulted in significant equity market volatility in the quarter.

Notably, Schwab opened 14.7 million new brokerage accounts in October, up significantly year over year. In November, it opened 430,000 accounts, up from 127,000 accounts in the previous year. The Zacks Consensus Estimate for the company’s active brokerage accounts for the fourth quarter is pegged at 28,770, which suggests significant improvement from the previous year’s reported number.

Thus, driven by the rise in volatility and increased client activity, Schwab’s trading revenues are expected to have improved in the to-be-reported quarter.

In fact, management is of the opinion that supported by continued elevated trading operations and stabilizing prepayment speed, total revenues for 2020 will likely grow 7.5-8%.

Along with recording solid trading performance, Schwab is expected to have witnessed a rise in total client assets and average interest-earning assets in the quarter.

The Zacks Consensus Estimate for total client assets is pegged at $5.9 trillion, indicating 45.6% growth from the previous year’s reported figure. Moreover, the consensus estimate for average interest-earning assets is pegged at $466 billion, which suggests growth of 72.6% year over year.

However, despite expected growth in interest-earning assets, Schwab’s net interest revenues are not likely to have witnessed significant improvement in the quarter because of continued near-zero interest rates. Management expects fourth-quarter NIM in the 150 basis points (bps) range.

Schwab’s operating expenses have remained elevated over the past few quarters. Moreover, because of continued regulatory spending as well as ongoing investments to drive operating efficiency, overall expenses are expected to have remained high in the to-be-reported quarter.

The company expects 2020 adjusted total expenses to be up 15.5-16.5%, including nearly a 4% rise for legacy Schwab and reflecting the impact of the expense synergies related to the buyout.

What the Zacks Model Unveils

According to our quantitative model, it cannot be conclusively predicted whether Schwab will be able to beat the Zacks Consensus Estimate this time. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better.

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 0.00%.

Zacks Rank: The company currently carries a Zacks Rank #2 (Buy). While this increases the predictive power of ESP, we also need a positive ESP to be confident of an earnings surprise call.

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 in their upcoming releases, per our model.

The Earnings ESP for Commerce Bancshares, Inc. CBSH is +0.99% and it carries a Zacks Rank #3, currently. The company is scheduled to report quarterly numbers on Jan 20.

BankUnited, Inc. BKU is slated to release earnings figures on Jan 21. The company, which carries a Zacks Rank #2 at present, has an Earnings ESP of +2.46%.

Capital One Financial Corporation COF is slated to release earnings figures on Jan 26. The company currently has a Zacks Rank #2 and an Earnings ESP of +3.50%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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