Key points
- The Charles Schwab Company had a decent quarter and is expected to return to growth soon.
- Margins are expanding sequentially and target robust cash flows and capital returns.
- Analysts provide a tailwind for the market, which could strengthen now that the results are out.
- 5 stocks we prefer to Charles Schwab
The Charles Schwab Company NYSE: SW it can make new highs, not just a new weekly or monthly high, but a new multi-year high with the potential for a new all-time high. The last year has been challenging for the company and investors with the banking crisis, shaken investor sentiment and tightened fiscal policy impacting results. The bottom line is that the company has weathered the storm and is set for an accelerated recovery over the next two years.
Forecasts point to a return to growth this year and double-digit revenue growth in 2025, which first-quarter results suggest are conservative. Since earnings are expected to grow at double the pace of revenues, investors could expect another robust year of dividends, dividend increases and share repurchases.
Charles Schwab Corporation had a good first quarter
Charles Schwab Corporation reported another year-over-year decline in revenue and earnings, but the metrics are good. YoY decline is narrowing, sequential growth is improving and margin is widening. The $4.74 billion in net revenue beat consensus estimates by a slim margin but was supported by all operating segments. The company reports a $96 billion increase in new customer net worth, or growth of 20%; Paid revenues tied to premium services also increased by 20%. Total customer assets surpassed $9.1 trillion, hitting a record high as new customers and new money poured into the platform.
The margin news is among the best details in the report. The company’s pre-tax profit margin improved 500 basis points to 37.9%, adjusted to 40.9%, and earnings are expected to hold. Margin gains are due to customer leverage and operational efficiencies which should drive improvement throughout the year; March data shows an acceleration in customer inflows. The bottom line is $0.74 in adjusted earnings, a penny better than expected.
The balance sheet remains healthy and the company’s liquidity is growing. The Tier 1 capital ratio is solid at 8.8% and cash flow is robust. The cash flow allowed for dividends and share repurchases, which reduced the diluted count by about 6% compared to last year. The dividend is in line with the general market average but is much safer because the payout ratio is less than 35%. Schwab does not make regular distribution increases but tends to increase over time. There is enough room in the numbers, so another increase could happen this year.
Analysts provide upside for Charles Schwab stock
Analysts cut their ratings and targets for SCHW stock last year, but the tide has turned in 2024 and there is a tailwind in place. Revisions leading up to the report’s release include numerous updates and target price increases. Their sentiment is consolidating to a moderate buy level and shares are trading above the broader consensus. The consensus assumes the market is fairly valued at current levels, but the new targets suggest an upside of up to 20% is expected. If analysts continue to positively review sentiment and price targets, the market should have no problem moving into the $80 to $85 region. Institutions also support this market. Their activity has been net positive for the market over the past two quarters, in line with the upward trend in price action.
Charles Schwab Company shares rose 5% after the release and may hit a new high soon. However, resistance is present at current levels and my ceiling rises. The critical line is near $72.50; a move above could take this market down to the $80 level. Assuming the company continues to strengthen its leverage and deliver expected results, analysts should continue to lift the market, possibly taking it to a new high. The risk for SCHW investors is the Fed. The Fed will likely keep interest rates higher than the market is pricing in and could lengthen the time until full recovery.
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