Investors like share buybacks. They’re not so crazy about mixed company earnings reports. So, it should come as no surprise that Charles Schwab's (NYSE: SCHW) stock recently declined following its less-than-steller Q2 earnings report and announcement of a pause in share buybacks. The investment bank said that it would instead focus on debt repayments, which suggests that the company’s outlook may not be as rosy as investors thought. From a high of $76.08 on July 11, shares are now trading around $64.74, a loss of almost 18%.
In its Q2 results, Charles Schwab reported adjusted EPS of $0.73, slightly above expectations, and net revenue of $4.69 billion, just below estimates. They added 990,000 new users (below estimates) for a total of 35.6 million. The company had net interest revenue of $2.16 billion, slightly under consensus, and NIM (net interest margin) of 2.03%, up one basis point.
What's New?
According to some analysts, company guidance is optimistic, perhaps overly so. Management aims to increase NIM from 2.03% to 3% by the end of 2025 and expects adjusted EPS to reach $0.80 to $0.90. However, as observers point out, the brokerage/bank is relying on falling interest rates to boost its NIM. There is some question about the potential impact of a Trump presidency on inflation and interest rates.
Charles Schwab has been successful in acquiring assets, leading its sector with $9.4 trillion in client assets for the previous quarter. On the other hand, the company’s balance sheet includes many assets with low yields. It purchased loans for its banks with very low interest rates and has $154 billion in loans that yield just 1.7%, compared to the current fed benchmark rate of more than 5%.
Pros and Cons
Do you buy SCHW or dump it? This is an expensive stock compared to its market peers, trading at 20.9x non-GAAP forward earnings. However, its P/E ratio is expected to decrease to 12.7 by 2026. Its PEG ratio is 0.93x, meaning it’s discounted in its sector. The analyst consensus is a Moderate Buy, with 10 Buys, 3 Holds, and 1 Sell rating. The average price target is $81.23, implying 30.45% upside potential.
Although Charles Schwab shows impressive client growth, there are concerns about the company's dependence on falling interest rates for NIM improvement and potential economic uncertainties. This leads to a more cautious view of the stock and the belief that it might be best for long-term investors.
Neither Julie Stoller nor Stocks.News have positions in this company.
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Contributing Writer
As a professional writer since 2012, Julie Stoller has covered many industries, from healthcare and technology to consumer products and industrials. She has written about IPOs, spinoffs, ETFs, stock splits, commodities, legislative actions impacting investors, and macroeconomic issues. While keeping up with the latest meme stocks and trends, Julie's special interests are discovering ...