Actions of online broker THE Charles Schwab Company (NYSE: SCHW) fell 8.8% through 12:55 p.m. EDT Tuesday, despite beating analysts’ expectations for the second quarter on both revenue and earnings figures.
At the start of the quarter, analysts expected Schwab to report earnings per share of $0.72 on sales of $4.68 billion. In fact, Schwab earned $0.73 on sales of $4.69 billion — and with a larger profit net interest margin by 2.03%.
Charles Schwab Second Quarter Results
So why doesn’t Schwab have any good news? For one thing, the news wasn’t as good as you might think. In fact, Schwab’s “$0.73” profit was just a pro forma figure. The company’s earnings, calculated according to generally accepted accounting principles (GAAP), were actually just $0.66 per share.
That was still $0.02 better than what Schwab earned a year ago, but it’s much less than the headline figure.
What really seems to worry investors is the fact that after “reporting its results,” Schwab management revealed on its post-earnings conference call that it was shrinking its banking operations to “protect the profits we are able to generate from owning a bank.”
CEO Walt Bettinger notably outlined a plan for the company to hold more customer deposits off balance sheet at its subsidiaries, in order to reduce capital requirements imposed by regulators. Adding to investor concerns, the CEO warned that one consequence of the move could be greater volatility in the company’s earnings going forward.
Is Schwab Stock a Buy?
Should this worry investors? I mean, it’s obvious. East worries them today – but should he?
It depends. On the one hand, Schwab stock looks pretty attractive today at 28 times earnings and a long-term growth rate of 26%. Even if earnings become “volatile,” if Schwab can achieve long-term average growth of 26%, that seems like a good valuation to me. On the other hand, if “volatility” means too many more quarters like this one where earnings are only growing 3% year over year, that growth is probably too slow to justify the price.
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Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Rich Smith…
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