Charles Schwab (BLACK) action sunk this week after the financial services giant declared profits and said he would pause his share buyback program in order to focus on paying down debt. However, even at this lower share price, there is no reason to buy this stock, as management is counting on interest rate cuts to boost the net interest margin (NIM) from 2.03% to 3%. That is why I am neutral on SCHW stock.
Charles Schwab scares investors
Charles Schwab is a behemoth in the stockbroking world, but its second-quarter results and comments appear to have spooked investors away from its own stock. That’s not to say there weren’t some bright spots. Charles Schwab reported mixed results for the second quarter, with earnings slightly above analyst expectations and revenue slightly below.
The company Adjusted earnings per share (EPS) were $0.73slightly beating the consensus estimate of $0.72, although it is down slightly from $0.74 in the first quarter and $0.75 in the second quarter of 2023. Net revenue for the second quarter was $4.69 billion, just below the average analyst estimate of $4.7 billion. That was down from $4.74 billion in the prior quarter, but up from $4.66 billion a year ago.
The brokerage platform added 990,000 new users, slightly below estimates of 1.04 million, and Charles Schwab now has 35.6 million active users. Additionally, Schwab’s total new net assets continue to trend in the right direction, reaching $74.2 billion, up from $72 billion in the second quarter of 2023, but down from $88.2 billion in the first quarter of 2023.
Meanwhile, net interest income came in at $2.16 billion, slightly below the consensus of $2.18 billion and down from the prior quarter and the same period last year, which could be due to “rate-sensitive client cash realignment activity.” NIM rose one basis point to 2.03%.
Of course, none of this sounds particularly worrisome. However, management appears to have spooked investors by announcing the suspension of its share buyback program in order to focus on paying down debt.
“There is an additional consideration at this point, which is that to the extent that we have additional borrowings outstanding, we may choose to use some of the cash that we would otherwise use for repurchases to reduce some of that debt at the bank level,” Chief Financial Officer Peter Crawford said in the results presentation.
The halt in share buybacks naturally increases downward pressure on the stock, with more shares outstanding than investors expected. However, Crawford stressed that prioritizing debt reduction over share buybacks would accelerate the repayment of additional debt. This strategy is intended to improve the company’s NIM and earnings growth over time.
A look at the valuation of SCHW shares
From a valuation perspective, Charles Schwab stock is very attractive. It currently trades at 20.9 times forward non-GAAP earnings, which puts it at a premium to the market. However, analysts are quite bullish on their growth expectations for the stock, with…
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