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Acquisitions to Aid Schwab's (SCHW) Top Line Amid Cost Woes
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Charles Schwab’s (SCHW - Free Report) inorganic growth efforts have reinforced its position as a leading brokerage player. The company has been offering commission-free trading, which has led to a rise in client assets and brokerage accounts. Further, higher interest rates will aid margin growth.
Analysts seem optimistic regarding the company’s earnings growth potential. The Zacks Consensus Estimate for SCHW’s current-year earnings has been revised 1.9% upward over the last 30 days.
However, because of the company’s inorganic growth efforts, expenses are expected to remain elevated, thus hurting profits to an extent. Thus, the company currently carries a Zacks Rank #3 (Hold).
Over the past three months, shares of SCHW have gained 16.8% compared with the industry’s 8% growth.
Image Source: Zacks Investment Research
Looking at its fundamentals, Schwab’s net interest margin (NIM) is expected to improve in the quarters ahead. NIM declined from 2.41% in 2019 to 1.62% in 2020 and to 1.45% in 2021. Nevertheless, as rates increased, the company’s NIM improved to 1.78% in 2022, with the uptrend continuing in the first six months of 2023.
With the Federal Reserve expected to keep interest rates high in the near term, the company’s margins will likely be positively impacted. Management expects NIM to reach the 210-bps range by the fourth quarter of 2023. We project the company's NIM to be 2.07% in 2023, 2.47% in 2024 and 2.93% in 2025.
Moreover, Schwab continues to benefit from aggressive efforts to increase client base in advisory solutions. While the company’s advice solution revenues declined in the first half of 2023, the same witnessed a compound annual growth rate (CAGR) of 12.2% over the last five years (2017-2022).
The acquisitions of USAA’s Investment Management Company, Wasmer, Schroeder & Company, LLC and the buyout of Motif’s technology and intellectual property have further strengthened Schwab's position and helped diversify revenues.
SCHW remains focused on maintaining a low-cost capital structure, which has been able to support its capital deployments. In January 2023, it announced a 14% hike in quarterly dividend, followed by one hike in July 2022, one in January 2022, one hike in 2020, one in 2019 and two in 2018. It also has a share repurchase program in place. In July 2022, the company authorized the repurchase of $15 billion worth of shares. As of Jun 30, 2023, $8.7 billion remained available under the authorization. The company is expected to continue to enhance shareholder value supported by efficient capital deployments.
However, continuously mounting operating expenses are expected to hurt the company’s bottom line to an extent. Expenses witnessed a CAGR of 16.8% over the last six years (2016-2022) mainly due to a rise in compensation and benefit costs, and acquisitions. The uptrend in costs continued in the first half of 2023. An increase in costs associated with compensation and regulatory spending as well as strategic buyouts are expected to keep total expenses elevated in the upcoming quarters.
Schwab’s trading revenues are expected to be under pressure for some time in the near term given the uncertain market conditions. While the company’s trading revenues witnessed a CAGR of 41.2% over the five-year period ended 2022, the same declined in 2022 and the first six months of 2023. The company has been focusing on enhancing trading revenues by undertaking several initiatives including lowering its basic online equity and ETF trade commissions to zero and reducing fees for the Schwab market cap-weighted index mutual funds.
It launched Schwab Stock Slices, through which investors are able to own shares of any company in the S&P 500 Index starting at $5 each, even though these shares cost more. These efforts, aimed at building client base, along with the acquisition of TD Ameritrade, are likely to lead to some improvement in trading income. However, per our estimates, SCHW’s trading revenues will be negatively impacted in the near term, as we expect a 9.6% decline in the metric in 2023.
The consensus estimate for SEIC’s current-year earnings has been revised 3.8% upward over the past 60 days. Over the past three months, SEIC’s share price has gained 4.4%.
Moody’s current-year earnings estimates have been revised 2.7% upward over the past 60 days. MCO’s shares have gained 5.5% over the past three months.
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Acquisitions to Aid Schwab's (SCHW) Top Line Amid Cost Woes
Charles Schwab’s (SCHW - Free Report) inorganic growth efforts have reinforced its position as a leading brokerage player. The company has been offering commission-free trading, which has led to a rise in client assets and brokerage accounts. Further, higher interest rates will aid margin growth.
Analysts seem optimistic regarding the company’s earnings growth potential. The Zacks Consensus Estimate for SCHW’s current-year earnings has been revised 1.9% upward over the last 30 days.
However, because of the company’s inorganic growth efforts, expenses are expected to remain elevated, thus hurting profits to an extent. Thus, the company currently carries a Zacks Rank #3 (Hold).
Over the past three months, shares of SCHW have gained 16.8% compared with the industry’s 8% growth.
Image Source: Zacks Investment Research
Looking at its fundamentals, Schwab’s net interest margin (NIM) is expected to improve in the quarters ahead. NIM declined from 2.41% in 2019 to 1.62% in 2020 and to 1.45% in 2021. Nevertheless, as rates increased, the company’s NIM improved to 1.78% in 2022, with the uptrend continuing in the first six months of 2023.
With the Federal Reserve expected to keep interest rates high in the near term, the company’s margins will likely be positively impacted. Management expects NIM to reach the 210-bps range by the fourth quarter of 2023. We project the company's NIM to be 2.07% in 2023, 2.47% in 2024 and 2.93% in 2025.
Moreover, Schwab continues to benefit from aggressive efforts to increase client base in advisory solutions. While the company’s advice solution revenues declined in the first half of 2023, the same witnessed a compound annual growth rate (CAGR) of 12.2% over the last five years (2017-2022).
The acquisitions of USAA’s Investment Management Company, Wasmer, Schroeder & Company, LLC and the buyout of Motif’s technology and intellectual property have further strengthened Schwab's position and helped diversify revenues.
SCHW remains focused on maintaining a low-cost capital structure, which has been able to support its capital deployments. In January 2023, it announced a 14% hike in quarterly dividend, followed by one hike in July 2022, one in January 2022, one hike in 2020, one in 2019 and two in 2018. It also has a share repurchase program in place. In July 2022, the company authorized the repurchase of $15 billion worth of shares. As of Jun 30, 2023, $8.7 billion remained available under the authorization. The company is expected to continue to enhance shareholder value supported by efficient capital deployments.
However, continuously mounting operating expenses are expected to hurt the company’s bottom line to an extent. Expenses witnessed a CAGR of 16.8% over the last six years (2016-2022) mainly due to a rise in compensation and benefit costs, and acquisitions. The uptrend in costs continued in the first half of 2023. An increase in costs associated with compensation and regulatory spending as well as strategic buyouts are expected to keep total expenses elevated in the upcoming quarters.
Schwab’s trading revenues are expected to be under pressure for some time in the near term given the uncertain market conditions. While the company’s trading revenues witnessed a CAGR of 41.2% over the five-year period ended 2022, the same declined in 2022 and the first six months of 2023. The company has been focusing on enhancing trading revenues by undertaking several initiatives including lowering its basic online equity and ETF trade commissions to zero and reducing fees for the Schwab market cap-weighted index mutual funds.
It launched Schwab Stock Slices, through which investors are able to own shares of any company in the S&P 500 Index starting at $5 each, even though these shares cost more. These efforts, aimed at building client base, along with the acquisition of TD Ameritrade, are likely to lead to some improvement in trading income. However, per our estimates, SCHW’s trading revenues will be negatively impacted in the near term, as we expect a 9.6% decline in the metric in 2023.
Stocks to Consider
A couple of top-ranked stocks from the finance space are SEI Investments Company (SEIC - Free Report) and Moody's Corporation (MCO - Free Report) . SEIC and MCO carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The consensus estimate for SEIC’s current-year earnings has been revised 3.8% upward over the past 60 days. Over the past three months, SEIC’s share price has gained 4.4%.
Moody’s current-year earnings estimates have been revised 2.7% upward over the past 60 days. MCO’s shares have gained 5.5% over the past three months.