Increased client activity in investing new assets helped Charles Schwab (NYSE:SCHW) post a 16% year-on-year growth in profits for the second fiscal quarter of 2012.  Despite low interest rates and weak trading volumes throughout the industry, the discount brokerage was able to grow profits to $275 million, up from $238 million reported last year. The strong performance was fueled primarily by an increase in client assets under management, which increased 4% over the prior year as the company attracted $16 billion in net new money. We discuss below a few key takeaways from Charles Schwab’s earnings, which were announced on Tuesday, 17th July.
Client Assets The Main Driving Force
- Schwab Earnings: Asset-Based Revenues Drive Strong Results
- Charles Schwab Earnings Preview: Asset-Based Revenues To Drive Q4 Results
- Marginal Growth In Trade Volumes In November For Charles Schwab
- Growth In Interest Revenues, Trading Commissions Drive Charles Schwab’s Q3 Results
- Charles Schwab Earnings Preview: Robust Trade Volumes Could Lead To A Profitable Q3
- Charles Schwab Reports Sustained Period Of High Trading Activity
Charles Schwab invests client assets into money market instruments, providing adviser services for clients who seeking to put cash in the volatile market. Interest on deposit, loans and securities account for 46% of the company’s value, according to our analysis. Even though interest rates have been low, leading to a flat yield curve,  the company has been consolidated client assets under management, through lucrative schemes and offers and by waiving fees (See our discussion: Chuck Gets To $16 By Giving Advisors More Tech Support)
As a result of innovation, Schwab reported an increase of 9% in client accounts enrolled in its advisory offerings or managed through a registered investment advisor (RIA). Revenue from money market funds increased from $59 million to $74 million over the last quarter. Increased focus on consolidation has helped the company navigate through the tough market environment, and will hold it in a solid position in the long run. We forecast a steady increase in managed assets, through our forecast period.
DARTs On Target
Charles Schwab observed 285,200 Daily Average Revenue Trades (DARTs) last quarter, a decline of 10% from the prior quarter. This decline might be attributed to a seasonal low, which is usually observed in the summer.
Although weak trading trends have affected industry peers TD Ameritrade Holding Corp. (NYSE:AMTD)  and E*TRADE Financial (NASDAQ:ETFC), Schwab’s acquisition of brokerage OptionsXpress Holdings Inc., fueled an 8% year-on-year growth in DARTs in the second quarter, this year. The company has taken several initiatives to attract investors (See article Charles Schwab Gets Tech Savvy En Route To $16). Trading commissions account for 21% of our price estimate for Schwab’s stock price and we forecast a gradual increase in trading volumes over the next few years, as the macro-economic outlook improves.
Our price estimate for Schwab is $16, implying a 20% premium to the current market price. You can gauge the impact of a change in forecasts, by modifying the charts above.
- UPDATE: Schwab Second-Quarter Profit Up 16%; Trading Revenue Gains, Wall Street Journal, 17th July, 2012 [↩]
- Forecasts Hint Fed Might Change Rate Guidance, Wall Street Journal, 26th June, 2012 [↩]
- TD Ameritrade Holding Corporation CEO Discusses F3Q12 Results – Earnings Call Transcript, Seeking Alpha, 17th July, 2012 [↩]