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Bear of the Day: Charles Schwab (SCHW)

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Charles Schwab (SCHW - Free Report) is a Zacks Rank #5 (Strong Sell) that is asavings and loan holding company, providing wealth management, securities brokerage, banking, asset management, custody, and financial advisory services.

The stock was up over 10% on the year until reporting disappointing earnings in July. Since then, the stock dropped over 15% and is now red for the year.

Investors might be tempted to buy the dip, but with the stock challenging 2024 lows, any market weakness could force another leg down.

About the Company

Charles Schwab was founded in 1971 and is headquartered in Westlake, Texas. The company's main subsidiaries include Charles Schwab & Co. (securities broker-dealer), Charles Schwab Investment Management (an investment advisor for Schwab's proprietary mutual funds and Schwab’s exchange-traded funds or ETFs), and Charles Schwab Bank (a federal savings bank).

The company has nearly 400 branches across 48 states and the District of Columbia, as well as locations in Puerto Rico, the United Kingdom, Hong Kong and Singapore.As of Jun 30, 2024, Schwab had 35.6 million active brokerage accounts, 1.9 million banking accounts, and 5.4 million workplace plan participant accounts.

The stock has a market cap of $115 billion and a Forward PE of 21. The stock holds Zacks Style Scores of “F” in Value, and “D” in Growth.

Q2 Earnings

On July 16th, Schwab reported earnings in line but missed on revenues. The company guided revenue flat to 2% y/y and said FY24 expenses would grow 2% y/y. The company pointed to certain uncontrollable items such as the increase in the exchange processing fee rate, incremental FDIC special assessment, and accrual related to the industry-wide regulatory review of off-channel communications.

Schwab also reported that its net interest margin (NIM), which is a key measure of profitability for financial firms, was under pressure. This happened because higher interest rates caused clients to move funds from low-interest cash sweep accounts to higher-yielding investment products, reducing Schwab’s ability to earn interest on client cash balances.

With that, the company saw a reduction in cash balances and said it would pause its share buyback program to pay off debt.

Estimates Trending Lower

Since the earnings report, analysts have started to cut their estimates and price targets.

For the current quarter, the estimates have dropped over the last 90 days, going from $0.87 to $0.75, or 14%.

The next quarter has seen a similar drop, with numbers falling from $0.93 to $0.83, or 10% over that same time frame.

Looking at next year over the last 90 days, analysts have dropped estimates by 9%, falling from $4.44 to $4.01.

With the drop in estimates, there have been analyst price target cuts as well.

Piper/Sandler was the most recent, cutting its target to $64 from $80.

Technical Take

After earnings stock is traded near the 2024 lows at $59.67, which came in late January. For now, investors have defended that low after the earnings drop. However, any market weakness would likely take stops out below the $60 area.

To show some progress, the bulls would need to back the 200-day MA at $68. The 50-day is attempting to breach that $68 level which would signal a “Death Cross”, which is extremely bearish.

If it starts to trend lower, the stock could fall to the $50-55 level, which was the support in late 2023.

In Summary

Charles Schwab is facing significant headwinds following its disappointing July earnings report. Despite being a strong player in the financial services industry, challenges like pressure on its net interest margin, declining cash balances, and pausing its share buyback program have caused analysts to cut estimates and price targets.

While some investors may be tempted to buy the dip, the stock's struggle to hold support at key technical levels, coupled with the possibility of a death cross, suggests caution. Any broader market weakness could lead to further downside, making it a risky bet in the near term.

For those interested in the space, a better option might be Interactive Brokers (IBKR - Free Report) . The stock is a Zacks Rank #1 (Strong Buy) that is coming off an earnings beat and is trading near all-time highs.  


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