Does Charles Schwab's (SCHW) Q1 Performance Suggest a Buying Opportunity?

The Charles Schwab Corporation (SCHW), a major player in retail investing, outperformed Wall Street's expectations in its first-quarter earnings report despite a revenue drop. The company demonstrated robust growth in its asset management sector, primarily driven by a significant increase in fee revenue.

However, I think waiting for an opportune moment to enter the stock market might be prudent. Let us understand that in detail.

During the fiscal first quarter ended March 31, 2024, SCHW demonstrated its resilience and appeal by attracting over 1 million new brokerage accounts. This surge in interest was reflected in the trading volume and margin balances, which saw a healthy increase of 15% and 9%, respectively.

Despite that, SCHW's average interest earning assets were $431.46 billion, falling short of analysts’ expectations. Additionally, the company’s overall profit at the brokerage decreased by 15% to $1.36 billion. This was primarily due to higher interest paid on client deposits and the company's own borrowings.

In terms of price performance, SCHW’s stock has soared 35.1% over the past year and 40.7% over the past six months, closing the last trading session at $72.93. However, it has a 24-month beta of 1.29, indicating high volatility.

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

Weak Financials

During the fiscal first quarter, which ended on March 31, 2023, SCHW’s total net revenue declined 7.3% year-over-year to $4.74 billion. Moreover, the company’s adjusted net income and adjusted EPS came in at $1.47 billion and $0.74, down 17.5% and 20.4% from the prior-year quarter, respectively.

Mixed Profitability

SCHW’s trailing-12-month asset turnover ratio of 0.04x is 82.6% lower than the industry average of 0.21x. Its trailing-12-month ROCE of 1.03% is 5.2% lower than the 1.09% industry average.

However, the stock’s 96.62% trailing-12-month gross profit margin is 61.9% higher than the industry average of 59.66%.

Stretched Valuation

SCHW’s forward non-GAAP P/E multiple of 21.22 is 114.8% higher than the industry average of 9.88. Its forward P/B ratio of 3.36x is 237.6% higher than the 0.99x industry average. Furthermore, its forward P/S multiple of 6.66 is 179.1% higher than the 2.39 industry average.

POWR Ratings Exhibit Mixed Prospects

SCHW’s uncertain fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, translating to a Neutral 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 C grade for Quality, which is consistent with its mixed profit margins.

In the Investment Brokerage industry, SCHW is ranked #16 out of the 20 stocks.

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

Bottom Line

An upturn in markets has driven an increase in the value of assets under management at brokerages. This has enabled brokerage firms to earn higher fees, even if fewer clients are investing in the funds.

While SCHW's asset management division has shown resilience, its first-quarter earnings highlighted vulnerabilities in its underlying fundamentals.

Moreover, its mixed profitability, stretched valuation, and high beta signal caution in the near term. So, it might be prudent for investors to wait for a better entry point into the stock.

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

With its uncertain short-term outlook, SCHW's chances of outperforming in the coming weeks and months are diminished. However, you might want to explore other stocks in the Investment Brokerage industry that carry an overall rating of B (Buy).

Oppenheimer Holdings, Inc. (DE) (OPY)

Piper Sandler Companies (PIPR)

Stifel Financial Corporation (SF)

To explore more investment brokerage stocks, click here.

What To Do Next?

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SCHW shares were trading at $72.99 per share on Friday morning, up $0.06 (+0.08%). Year-to-date, SCHW has gained 6.52%, versus a 5.33% rise in the benchmark S&P 500 index during the same period.

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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