The Charles Schwab Corporation (SCHW - Get Rating) operates as a savings and loan holding company offering wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. The company operates in two segments, Investor Services and Advisor Services. 

SCHW is scheduled to reveal its fiscal fourth-quarter earnings (ended December 2023) on January 17, 2024. Wall Street predicts the revenue for the fourth quarter to reach $4.49 billion, reflecting an 18.3% year-over-year decline. While its projected EPS for the same quarter is $0.64, indicating a 40.3% year-over-year decrease.

In its third-quarter earnings report, SCHW exceeded Wall Street expectations, highlighting robust growth in its asset management business. The company’s performance was propelled by a significant increase in its fees.

However, despite the impressive asset management growth, the company’s top line fell short of street estimates, experiencing a substantial decline primarily influenced by the temporary use of higher-cost funding, diminished interest-earning assets, and reduced trading volumes.

On the other hand, SCHW’s net interest revenue experienced a 23.5% year-over-year decline, reaching $2.24 billion, reflecting the impact of client allocation decisions in a higher interest rate environment. Additionally, its trading revenue saw a 17.4% year-over-year drop, amounting to $768 million, missing the analyst estimate of $804 million.

Furthermore, the company’s number of new brokerage accounts in the quarter remained unchanged from a year ago but witnessed a 7% decline compared to the second quarter of 2023.

Meanwhile, Citi downgraded SCHW to Neutral from Buy and cut its price target to $70 from $75, indicating a cautious stance on the stock’s future performance. SCHW’s shares plummeted 2.9% over the past five days to close the last trading session at $65.23.

Here are the financial aspects of SCHW that could influence its performance in the near term:

Deteriorating Financials

For the fiscal third quarter, which ended on September 30, 2023, SCHW’s total net revenue declined 16.3% year-over-year to $4.61 billion, while its total expenses excluding interest increased 14.2% from the year-ago value to $3.22 billion.

Moreover, the company’s adjusted net income and adjusted EPS came in at $1.52 billion and $0.77, down 31.3% and 30% from the prior-year quarter, respectively.

Unoptimistic Analyst Estimates

The consensus revenue estimate of $18.91 billion for the fiscal year ended December 2023 represents an 8.9% year-over-year decline. Meanwhile, the consensus EPS estimate of $3.11 for the same period reflects a 20.2% year-over-year plunge.

Stretched Valuation

In terms of forward Price/Sales ratio, SCHW’s 6.29x is 139.4% higher than the industry average of 2.63x. Likewise, the stock’s forward non-GAAP P/E multiple of 20.95 is 104.3% higher than the industry average of 10.25. Furthermore, its forward Price/Book ratio of 3.97x is 245.5% higher than the 1.15x industry average.

POWR Ratings Exhibit Bleak Prospects

SCHW’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, translating to a Sell in our proprietary rating system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SCHW has a D grade for Growth, justified by the poor financial result in its last reported quarter.

Likewise, SCHW’s D grade for Value is consistent with its higher-than-industry valuation. Furthermore, the stock’s D grade for Sentiment is in sync with the bleak analyst estimates for the fiscal year ended December 2023.

In the Investment Brokerage industry, SCHW is ranked last out of the 20 stocks.   

Beyond what we’ve stated above, we have also rated the stock for Momentum, Stability, and Quality. Get all ratings of SCHW here.

Bottom Line

Despite demonstrating resilience in its asset management division, SCHW’s underlying fundamentals reveal weaknesses, as evidenced by lackluster third-quarter results, a recent downgrade by Citi, negative projections from analysts, and elevated valuation.

With the company all set to announce its fourth-quarter results tomorrow, the convergence of the aforementioned factors casts a cautious shadow on the outlook for the stock’s future performance. Therefore, it might be prudent for investors to steer clear of SCHW.

How Does The Charles Schwab Corporation (SCHW) Stack Up Against Its Peers?   

While SCHW has an overall grade of D, equating to a Sell rating, you may also check out these other stocks within the Asset Management sector: Silvercrest Asset Management Group Inc. (SAMG - Get Rating), Westwood Holdings Group, Inc. (WHG - Get Rating), and Victory Capital Holdings, Inc. (VCTR - Get Rating). For exploring more Asset Management stocks, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

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SCHW shares were trading at $64.37 per share on Tuesday afternoon, down $0.86 (-1.32%). Year-to-date, SCHW has declined -6.44%, versus a -0.15% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Mukherjee

Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run. More...

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