Schwab Notes: Growth Plans, Higher Trading Volumes Lift Q4 Outlook

Charles Schwab Corporation (NYSE:SCHW) seems to be keeping up the growth momentum of the previous quarter. The company recently announced the acquisition of Compliance 11, Inc. and also showed some interest in buying a part of, now bankrupt, MF Global, which clearly shows its appetite for growth. Uncertainty in the market regarding the Euro zone is expected to improve trading volumes at brokerages, such as Schwab, E-Trade (NASDAQ:ETFC) and Ameritrade (NYSE:AMTD), as happened in the last quarter.

Our price estimate for Schwab is $15, around 20% greater than current market price.

See our complete analysis of Schwab’s stock

Schwab continues expansion via acquisition

Schwab recently reported its plans to acquire Compliance 11, Inc., a leading provider of cloud-based compliance software. The company sees this combination to be rewarding as it will help it serve its corporate clients better, assisting them to simplify and better manage disclosures, reporting needs, and employee compliance procedures. ^[1]

The acquisition of optionXpress, completed last quarter, is already proving beneficial to the company. With MF Global filing for bankruptcy, the company is looking to move its future clients in-house, whereas other trading partners of the bankrupt firm are switching to different brokerage firms. ^[2] Schwab has also expressed interest in purchasing MF Global retail futures business where the expected purchase price will be in form of ‘success fees’ with negligible up-front payment (if any). ^[3] If this deal comes through, it will be able to strengthen its position in futures trading market. The company has provided charge guidance for restructuring expenses in the range of $5 million to $10 million. Though given the mess right now at MF Global, we don’t see any imminent deal.

Trading revenues to remain high in current quarter

The prevailing market volatility due to the uncertainty clouding Euro zone debt crisis has kept the trading volumes high in the fourth quarter. This translate into higher revenue from trading for brokerages, such as Schwab. The company will release its monthly trading activity for October 2011 early next week, and is expected to report higher trading volumes, as seen in monthly metric report released by its peer, Ameritrade. ^[4]

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Schwab Expands Commitment to Designated Brokerage Business with Plans to Acquire Compliance11, Inc., Charles Schwab Press Release [↩]
2. E*Trade switches to R.J.O’Brien after MF collapse, Reuters [↩]
3. Charles Schwab Eyes Part of MF Global’s Futures Business, Fox Business News [↩]
4. TD Ameritrade Reports Monthly Metrics, Ameritrade Press Release [↩]