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Stock Analyst Update

Schwab’s Recent Quarter Wasn’t the Best

Despite results that disappointed the market, the company's underlying fundamentals and prospects for material earnings growth remain solid.

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Wide-moat-rated Charles Schwab (SCHW) missed the consensus while shareholders' equity took an accounting hit in the March quarter but near- to medium-term prospects are still strong. Schwab reported adjusted net income that excludes acquisition-related expenses of $1.47 billion, or $0.77 per diluted share, on $4.67 billion of net revenue. Adjusted EPS and net revenue missed the FactSet consensus estimates of $0.84 and $4.83 billion, respectively. Shareholders' equity also declined 15% sequentially to $48.1 billion. Despite results that disappointed the market, the company's underlying fundamentals and prospects for material earnings growth remain solid, and we assess shares are being undervalued relative to our $89 per share fair value estimate.

Most of the company's metrics are largely moving as we expected. Net revenue declined 1% both sequentially and on a year-over-year basis. The decline from a year ago was due mainly to $253 million less in trading revenue. The first quarter of 2021 had high annualized trades per account of over 65 compared with an average of 50 since the TD Ameritrade merger. The sequential revenue decline was due to weaker trading and asset management revenue. Given the 6% decline in the Morningstar US Market index during the first quarter, lower asset management revenue was to be expected.

A more important indicator of future earnings was net interest income, which increased 2% sequentially and 14% year over year to $2.18 billion. Average bank deposits that power net interest income also grew 10% sequentially and 25% year over year to $453 billion. Given rising interest rates, and with interest rate-related revenue being over 50% of total revenue, the healthy growth in net interest income and deposits should be the focus.

While shareholders' equity declined during the quarter, most of it was likely due to rising interest rates causing unrealized losses on the fixed-income securities the company holds. We believe Schwab's capital position is fine.

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Michael Wong does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.