Charles Schwab Stock Is Trailing S&P500 By 8% YTD, What To Expect From Q2 Results?

Charles Schwab (NYSE: SCHW) stock gained 10% YTD, as compared to an 18% rise in the S&P500 index. In sharp contrast, Charles Schwab’s peer BlackRock (NYSE: BLK) is up only 3% YTD. Overall, SCHW is scheduled to report its fiscal Q2 2024 results on Tuesday, July 16, 2024. We expect it to top the street estimates of revenues and earnings. The company surpassed the earnings consensus in the last quarter. It reported total revenues of 4.74 billion – down 7% y-o-y, mainly due to lower net interest income (NII) and trading revenues. Notably, the NII was down because of a fall in interest-earnings assets and net interest yield. On the flip side, the top line was somewhat supported by growth in asset management & administration fees and bank deposit account fees. We expect the NII to see some improvement in Q2. Our interactive dashboard analysis on Charles Schwab’s Earnings Preview has more details.

Amid the current financial backdrop, SCHW stock has shown strong gains of 35% from levels of $55 in early January 2021 to around $75 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. However, the increase in SCHW stock has been far from consistent. Returns for the stock were 59% in 2021, -1% in 2022, and -17% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that SCHW underperformed the S&P in 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Financials sector including JPM, V, and MA, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could SCHW face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

Our forecast indicates that Charles Schwab’s valuation is $78 per share, which is 4% above the current market price of around $75. 

(1) Revenues to edge past the estimates

Charles Schwab’s revenues decreased 9% y-o-y to $18.84 billion in FY 2023.

• The net interest income (NII) fell by 12% y-o-y in 2023, followed by a 19% drop in Q1 2024. That said, we expect the stream to see some growth in the second quarter.
• The trading revenues suffered a 12% decline in 2023. Further, it decreased 8% in the first quarter. We expect it to follow the same trend in Q2.
• The asset management and administration fees increased 13% y-o-y in 2023. Further, the same momentum continued in Q1 as well. We expect the second quarter results to be on similar lines.
• Overall, we forecast Charles Schwab’s revenues to touch $19.66 billion in FY2024.

Trefis estimates Charles Schwab’s fiscal Q2 2024 net revenues to be around $4.77 billion, 2% above the $4.68 billion consensus estimate.

(2) EPS is likely to top the consensus

Charles Schwab Q2 2024 adjusted earnings per share (EPS) is expected to be $0.75 per Trefis analysis, almost 4% above the consensus estimate of $0.72. The adjusted net income decreased 30% y-o-y to $4.65 billion in FY 2023. It is partly because of lower revenues and partly due to higher noninterest expenses. Further, the same trend continued in the first quarter of 2024, leading to an 18% drop in the adjusted net income (Q1). That said, we expect the net income margin to improve in Q2. Overall, Charles Schwab is likely to report an annual GAAP EPS of $3.32 for FY 2024.

(3) Stock price estimate is 4% above the current market price

We arrive at Charles Schwab’s valuation, using an EPS estimate of around $3.32 and a P/E multiple of just below 24x in fiscal 2024. This translates into a price of $78, which is 4% higher than the current market price. 

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year 

[1] Returns as of 7/15/2024
[2] Cumulative total returns since the end of 2016

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