Ameritrade And Charles Schwab Face Another Earnings Test Amid A Rough Market

by Trefis Team
-7.80%
Downside
27.04
Market
24.93
Trefis
SCHW
Charles Schwab
Rate   |   votes   |   Share

Online brokerage firms Charles Schwab (NYSE:SCHW) and Ameritrade (NYSE:AMTD) are expected to announce their earnings for the second quarter of 2012, on Tuesday, 17th July. [1] Uncertain market conditions have dampened trading volumes over the last few months, thereby exerting pressure on revenues.

We expect the companies to focus on increasing client assets under management to offset effects of low interest rates on income. The trends observed in the companies reports will also give an indication of the performance of industry peers E*TRADE Financial (NASDAQ:ETFC), which will report its earnings on Thursday, 19th July. We discuss below a few key parameters reported by the firms, which will be of particular importance to our valuation.

See Our Full Analysis for : Charles Schwab|Ameritrade|E*TRADE Financial

Darts Off Target

Daily Average Revenue Trades (DARTs) executed by both firms have been slipping over the last few years. Ameritrade reported a 12% year-on-year decline in trade volumes for the first quarter of 2012, this downward trend continued in May, as U.S. trades dropped 5% year-on-year. [2]

With the economic recovery in the U.S. moving slower than expected and the European sovereign debt crisis set to continue on a knife’s edge, we expect daily trade volumes to remain low. To further add to the misery, the brokerage usually experiences a seasonal slowdown during the summer. This will have a major impact on Ameritrade, which derives 37% of its value from trading commission, according to our analysis.

Charles Schwab will be slightly less concerned about the dwindling trade numbers as trading commissions account for 21% of our price estimate for the company’s stock price. Schwab reported a 9% year-on-year increase in DARTs this May. Technological innovations discussed in our article Charles Schwab Gets Tech Savvy En Route To $16 could well attract customers to the brokerage, even in uncertain times.

Client Assets To Help

With interest rates set to remain low and a flat yield curve, [3] both companies are focusing on consolidating client assets under management.  In the last quarter, Ameritrade added $11 billion in new client assets, whereas as Charles Schwab added $27 billion, reaching a total of $1.83 trillion assets. Although the total number fell 4% in May, to $1.76 trillion, the company continues to focus on adding new client assets to withstand the low interest rate environment.  Net Interest income on client balances are vital to both brokerages, accounting for more than half (54%) of Ameritrade’s value and 45% of Schwab’s value, according to our estimate.

Adding Brokerage Accounts

Ameritrade and Charles Schwab have been adding lucrative products to their range of offerings in order to attract investors. (See Chuck Gets To $16 By Giving Advisors More Tech Support and Ameritrade Heads To $20, Offers Tasty Market Analysis) These innovations helped fuel a 7% year-on-year increase in Schwab’ active brokerage accounts, which opened 70,000 new accounts, in May. We expect the number of brokerage accounts, managed by both brokerages to increase through our forecast period.

Our price estimates for Ameritrade and Charles Schwab are $20 and $16 respectively, both about 25% ahead of the current market price. You can gauge the impact of a change in forecasts, by modifying the charts above.

Submit a Post at Trefis Powered by Data and Interactive Charts | Understand What Drives a Stock at Trefis

Notes:
  1. EARNINGS PREVIEW: Online Brokers Face Headwinds from Europe, Low Rates, Wall Street Journal, 10th July, 2012 []
  2. Schwab Reports Y/Y Jump in DARTs, Zacks Equity Research, 18th June, 2012 []
  3. Forecasts Hint Fed Might Change Rate Guidance, Wall Street Journal, 26th June, 2012 []
Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!