Charles Schwab Earnings Preview: Why Schwab’s FY19 Results Are Likely To Fall Short Of Expectations

by Trefis Team
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Charles Schwab (NYSE: SCHW) will release its Q4 and full-year 2019 results on Thursday, January 16. Trefis details expectations from the brokerage giant in an interactive dashboard, parts of which we highlight below. We believe that Charles Schwab will meet FY19 earnings expectations despite missing on revenues. We expect the company’s revenues to have increased to $10.68 billion in 2019 from $10.1 billion in 2018 despite doing away with trade commissions last October thanks to the growth in interest on deposits, loans, and securities. However, it is likely to be marginally below the consensus estimate of $10.71 billion. Also, the EPS figure should have improved to $2.68 (the same level as the consensus figure) from $2.47 in 2018 due to a combination of higher revenues and slightly lower growth in expenses, improving the net income margin. Since the expected results are almost the same as the consensus estimate for FY 2019, it should not result in any significant movement in Charles Schwab’s stock price once it announces earnings. Further, our forecast indicates that Charles Schwab’s valuation is $42 a share, which is roughly 15% below the current price of around $48.

(1) Charles Schwab’s revenues would have increased 5.4% to $10.7 billion in 2019; marginally below consensus estimates

  • Trefis estimates Charles Schwab’s 2019 revenues to be $10.68 billion, slightly below the consensus estimate of $10.71 billion.
  • Charles Schwab’s Net Revenues have grown at a CAGR of 16% from $7.5 billion in 2016 to $10.1 billion in 2018, primarily driven by the net interest income, supported by increasing short-term interest rates.
  • The expected growth of $600 million in 2019 would primarily be due to an increase in interest on deposits, loans, and securities revenues.
  • The interest on deposits, loans, and securities would benefit from a slight improvement in net interest margin as well as from steady growth in interest-earning assets.
  • Overall, this should have helped the brokerage giant’s 2019 revenues increase to $10.7 billion.
  • The company reduced its trading commissions to zero with all major brokerages doing away these commissions last October to tackle the increasing popularity of zero-commission brokerages like Robinhood.
  • Further, the company has announced its plans to merge with TD Ameritrade in late November, the deal is pending regulatory approval, and the integration of the two firms should take 18 to 36 months once the deal closes in the second half of 2020.
  • Notably, we estimate that Charles Schwab will forego potential revenues of nearly $500 million in 2020 due to its decision to eliminate trading commissions.

Our interactive dashboard analysis, How Does Charles Schwab Make Money?, provides an in-depth view of the company’s revenues along with our forecasts and a comparison of trends with peers TD Ameritrade and E*TRADE.

 

(2) EPS likely to increase by 8.7% from $2.47 in 2018 to $2.68 in 2019, which is at par with market expectations

  • We expect Charles Schwab’s 2019 earnings per share (EPS) to be $2.68 per Trefis analysis, which is same as the consensus estimate of $2.68 per share
  • An increase in revenues as detailed above will drive EPS growth despite an expected increase in Total Expenses by 3.8%.
  • As we forecast Charles Schwab’s Revenues to grow at a faster rate than Expenses in 2019 (5.4% vs. 3.8%), this will result in a 100 bps increase in Charles Schwab’s Net Income Margin figure from 32.9% in 2018 to 33.9% in 2019.
  • For 2020, we believe that lower expenses would offset the impact of a slight drop in revenues, resulting in the net income margin figure improving to 35.5%.

(3) Stock price estimate ~15% lower than the market price

  • A trailing P/E multiple of 15.5x looks appropriate for Charles Schwab’s stock, as opposed to the implied P/E multiple of 17.8x using the current market price.
  • Trefis’ forecast for Charles Schwab’s 2019 earnings is at par with the market expectations; however, trailing P/E multiple is lagging. Taken together, this works out to a fair value of $42 for Charles Schwab’s stock, which is 15% below the current market price of around $48.

Additionally, you can input your estimates for Charles Schwab’s key metrics in our interactive dashboard for Charles Schwab’s pre-earnings, and see how that will affect the company’s stock price.

 

See all Trefis Price Estimates and Download Trefis Data here

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