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Will Volatile Markets Drive Q1 Earnings for Schwab (SCHW)?

The Charles Schwab Corporation SCHW is scheduled to report its first-quarter 2016 results on Apr 15, before the market opens.

This San Francisco-based investment broker delivered in-line earnings in the fourth quarter of 2015. Revenue growth and absence of provisions were offset by higher expenses. Moreover, the company recorded an average negative surprise of 0.08% in the trailing four quarters.

Is Schwab likely to miss on earnings this quarter? Let’s see how things have shaped up for this announcement.

What to Expect in Q1?

With global headwinds plaguing the entire financial market, the brokerage industry also seems ill-equipped to combat the impact of the same. The first-quarter 2016 is expected to witness weak capital market revenues along with a decline in investment banking revenues. Equities revenues as well as fixed income, currencies and commodities (FICC) revenues are also projected to fall.

However, Schwab has emerged as a big player in the investment market with a wide variety of investing services and online trading system. Also, the company has been expanding its focus on exchange-traded funds, offering a diversified lineup to investors. This will likely help the company stand its ground despite the global issues affecting the brokerage industry.

In January, Schwab added two new providers and 14 new commission-free ETFs to Schwab ETF OneSource, which is the largest commission-free ETF platform launched in 2013. This will help it gain market share, thereby boosting top-line growth.

Extreme equity market volatility witnessed during the quarter will likely drive Schwab’s daily trading volumes. Also, the company opened 83,000 and 84,000 new brokerage accounts in January and February, respectively (based on the monthly reports released by the company), which indicates that investors were interested in entering the market. Hence, trading revenue is likely to trend upward in the quarter.

Further, Schwab witnessed an increase in average interest-earning assets in both the months, which should boost asset management fees as well as net interest revenue during the quarter.

While the effect of the interest rate hike in mid-December will be reflected in form of a decline in money market waivers in the upcoming release, the Federal Reserve’s dovish stance so far this year may dampen the impact. Though the company is undertaking initiatives to reduce its sensitivity to interest rate, no further improvement in the rate environment will hurt top-line performance.

Operating expenses should increase year over year as Schwab continues to incur costs related to compensation and regulatory spending. According to its winter business update, management plans a significant ramp-up in project and marketing spending as well as increased client service expenses, corresponding to revenue growth.

Schwab’s activities during the quarter were insufficient to win analysts’ confidence. As a result, the Zacks Consensus Estimate remained stable at 29 cents per share in the past 7 days.

Earnings Whispers

Our proven model does not conclusively show that Schwab is likely to beat the Zacks Consensus Estimate in the first quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least #2 (Buy) or #3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: The Earnings ESP for Schwab is 0.00%. This is because the Most Accurate estimate of 29 cents per share stands on par with the Zacks Consensus Estimate.

Zacks Rank: Schwab’s Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise call.

Stocks That Warrant a Look

Here are a few finance stocks that you may want to consider, as they have the right combination of elements to post an earnings beat this quarter, according to our model.

The Earnings ESP for The Blackstone Group L.P. BX is +35.29% and it has a Zacks Rank #3. The company is slated to release results on Apr 21.

BlackRock, Inc. BLK has an Earnings ESP of +1.85% and a Zacks Rank #2. It is scheduled to report results on Apr 14.

PrivateBancorp, Inc. PVTB has an Earnings ESP of +1.75% and a Zacks Rank #3. It is slated to report results on Apr 21.

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PRIVATEBANCORP (PVTB): Free Stock Analysis Report
 
SCHWAB(CHAS) (SCHW): Free Stock Analysis Report
 
BLACKSTONE GRP (BX): Free Stock Analysis Report
 
BLACKROCK INC (BLK): Free Stock Analysis Report
 
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