Zacks_Analysts' Blog : Charles Schwab Outpaces - Analyst Blog

Charles Schwab Corporation’s (SCHW) first quarter 2011 earnings came in at 20 cents per share, a penny ahead of the Zacks Consensus Estimate of 19 cents. This also compares favorably with the year-ago quarter’s earnings of 11 cents. 

Charles Schwab’s net income for the reported quarter stood at $243 million, up 84% compared with $132 million in the prior-year quarter. However, if one time charges are taken into consideration for the first quarter of 2010, net income for the reported quarter saw an enormous jump from $6 million in the prior-year quarter.

Charles Schwab’s results benefited from improved revenue and increase in interest-earning assets. Additionally, fall in non-interest expenses was also a positive for the company.

On March 21, Charles Schwab had announced an all-stock deal to acquire optionsXpress Holdings Inc. (OXPS) for $1.0 billion. Under the agreement, the company will give 1.02 shares for each share of optionsXpress. The deal is valued at $17.91 per share or 17% premium to the closing price of optionsXpress’ stock as of March 18. The company anticipates the deal to be modestly accretive and expect synergies worth $80 million in the first full year of combined operations.

Details

Net revenue for the reported quarter was $1,207 million, up 7.1% from $1,127 million in the prior quarter and 23% from $978 million in the prior-year quarter. This also compares favorably with the Zacks Consensus Estimate of $1,180 million. The substantial rise in net revenue for the quarter was primarily attributable to growth in net interest revenue, asset management and administration fees and trading revenue.

Charles Schwab’s average interest-earning assets for the reported quarter surged 24.7% year over year to $90.13 billion.

For the reported quarter, total non-interest expenses fell 9.5% sequentially and 15.8% year-over-year to $813 million. Charles Schwab’s expenses mainly dropped as a result of absence of class action litigation and regulatory reserve charges and money market mutual fund charges that had inflated the expenses in the prior quarters.

Charles Schwab’s pre-tax profit margin in the fourth quarter improved significantly to 32.6% from a low of 1.3% in the prior-year quarter.

As of March 31, 2011, Charles Schwab had total client assets of $1.65 trillion (up 10% year-over-year). New client assets were $23.0 billion compared with $26.2 billion at the end of the prior quarter and $23.3 billion at the end of the prior-year quarter. New brokerage accounts were 224,000, down 3% from the year-ago quarter.

As of March 31, 2011, Charles Schwab had a total of 8.1 million total brokerage accounts, 719,000 banking accounts and 1.44 million corporate retirement plan participants.

Annualized return on equity (ROE) as of March 31, 2011, came in at 15%, up from 8% in the prior year quarter.

Our Take

While focus on lower-cost capital structure will sustain better results in the upcoming quarters, Charles Schwab’s financials will continue to be impacted by lower trading activity and volatile interest rates. However, after the completion the optionsXpress, the company’s top line will benefit from increased trading in derivatives.

Charles Schwab’s close competitor E*TRADE Financial Corporation (ETFC) is scheduled to release its first quarter 2011 earnings on April 20.

Charles Schwab currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we are maintaining our long-term ‘Neutral’ recommendation on the shares.