Updated Aug 7 at 11:23am ET.
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U.S. employers cut 23,000 jobs in July, falling far short of the 80,000 gains analysts expected. This surprise weakness in the labor market often leads the Federal Reserve to lower interest rates to help stimulate the economy. For a company like Schwab, lower rates are a double-edged sword.
Schwab makes a large portion of its money from net interest margin, which is the difference between what it earns on client cash and what it pays out in interest. While lower rates can sometimes encourage more trading and investing, they generally reduce the profit Schwab earns on that idle cash. If this job report leads to a faster cycle of rate cuts, it could put pressure on Schwab's primary source of earnings in the coming months.
Source: Bloomberg Markets and Finance
Schwab led a Series B funding round for Provable Markets, a broker-dealer that runs a platform for securities finance. Securities finance is the plumbing that allows big institutions to borrow and lend stocks and bonds to each other. By backing this infrastructure, Schwab is helping modernize the systems that keep markets liquid. While this is a small investment for a company of this size, it shows Schwab's focus on staying at the center of how trades are executed and settled.
Source: PRNewsWire
Schwab reported record quarterly revenue of $7.1 billion, up 21 percent from a year ago. Adjusted earnings per share reached $1.62, which was higher than the $1.56 analysts expected. The company's ability to grow while keeping costs in check drove a 42 percent jump in earnings per share compared to the same period last year.
The most important detail for the long term is that clients brought in $120 billion in core net new assets during the quarter. This included a record June where assets grew at an annualized rate of nearly 6 percent. As long as Schwab continues to attract these new assets, it builds a larger base to earn interest and advisory fees in the future.
See the full quarter, and how our tracked metrics did
Source: 8-K filing
The Schwab Trading Activity Index, which tracks what millions of retail clients are actually doing with their accounts, rose to its highest level in four years this June. This suggests that individual investors are becoming more comfortable putting money to work in the markets after a period of caution. For Schwab, higher trading activity is generally a good sign for engagement, though the company now earns much more from interest and wealth management fees than from trade commissions. The real value here is that active traders tend to keep more assets on the platform, which Schwab can then monetize through its banking and advisory services.
Source: Business Wire
Analysts have recently issued a flurry of price target increases following the company's strong performance in July. Most analysts, 29 of 51, rate the stock a buy, and the average target of $127 suggests 18% upside from today's price.
The company has a perfect record of beating analyst expectations over the last two years. This suggests management is very good at managing expectations and the business is consistently outperforming what the market predicts.
| Expectation | |
|---|---|
| EPS | $1.67 |
| Revenue | $7.21B |
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