Wednesday, April 13, 2011

Charles Schwab Corp. (NYSE: SCHW): Q1 Earnings Preview 2011

Charles Schwab Corp. (NYSE: SCHW), the largest independent broker by client assets, is scheduled to release its first quarter earnings on Friday, April 15, 2011. Analysts, on average, expect the company to report earnings of 18 cents per share on revenue of $1.18 billion. In the year ago quarter, the company reported breakeven per share on revenue of $978 million.

The Charles Schwab Corporation, through its subsidiaries, provides securities brokerage, banking, and related financial services to individuals and institutional clients. As of February 28, 2011, Charles Schwab had total client assets of $1.6 trillion.

In the preceding fiscal fourth quarter, the San Francisco, California-based company's net income was $119 million, or 10 cents per share, compared with a profit of $164 million, or 14 cents per share, in the year-ago quarter. 14% to $1.127 billion from $986 million in the prior year. Analysts, on average, expected the company to report earnings of 10 cents per share on revenue of $1.11 billion. The results benefited from improved revenue and increase in interest-earning assets. 

Online brokerages like Charles Schwab Corporation rely significantly on net interest income as a source of value. As interest rates fall, the net interest earned by assets falls as the company earns a lower interest rate on assets in its possession. For the past couple of years, as a result of low interest rates and declining trading volumes Charles Schwab has been struggling to retain its growth momentum. Reduced trade volumes and low interest rates have adversely affected several companies in the investment brokerage industry. As a result, some companies are shifting their business model to adjust to the current nature of the market. The industry is also at odds with regards to the changes some are making in regard to exchange-traded funds.

The sector likely benefited from robust trading volumes in January and February. The picture is less certain for March, as retail trading volumes tapered in the second half of the month.

Last month, the company announced a deal to acquire another investment brokerage firm optionsXpress Holdings, Inc. for about $1 billion. The move should help improve the equity trading side of its business. It could also facilitate an expansion into derivatives trading. The acquisition will also enable Charles Schwab to diversify its online cash equity platform to faster growing futures trading and foreign exchange areas.  Schwab estimates the transaction to be modestly accretive over the first full year of combined operations, including expected revenue and expense synergies totaling about $80 million  ($60 million from revenue and $20 million in cost savings). The deal is expected to close in the third quarter.  OptionsXpress had 385,200 client accounts, $8.1 billion in assets and a 12-month average of 44,800 daily average revenue trades, according to the statement. Options trading in the U.S. has increased every year since 2002, rising 7.9 percent to 3.9 billion contracts in 2010, according to data compiled by OCC. So far this year, average daily US options volume has jumped 21% from last year's record.

The company's stock currently trades at a forward P/E (fye Dec 31, 2012) of 16.10 and PEG Ratio (5 yr expected) of 1.47. In terms of stock performance, SCHW shares have lost nearly 6% over the past year.

Full Disclosure: None.
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