The eagerly anticipated fourth-quarter earnings report from Charles Schwab is set to be released on Wednesday. This report presents an important opportunity for investors to gauge whether the challenges faced by the company in 2023 are subsiding.
According to Wall Street analysts, Schwab is expected to report earnings per share of 64 cents, along with revenue of $4.5 billion for the fourth quarter. In comparison, the same period in 2022 saw earnings per share of $1.07 and revenue of $5.5 billion, as reported by Factset.
Analysts have also provided forecasts for the entire year of 2023. They predict that Charles Schwab will report earnings per share of $3.12, accompanied by revenue of $18.9 billion. These figures represent a decline from the previous year, with 2022 yielding earnings per share of $3.90 and revenue of $20.8 billion.
As one of the largest financial-services companies in the nation, Charles Schwab faced difficulties in 2023 due to higher interest rates. This prompted customers to withdraw uninvested cash from low-yielding sweep accounts at Schwab's bank and seek better options, such as money-market funds. Known as cash sorting, this process poses two challenges for Schwab's earnings. Firstly, the company generates less revenue from these alternative cash products compared to sweep accounts. Secondly, when outflows from sweep accounts exceed available cash, Schwab has to rely on costly short-term funding.
During the regional bank crisis in March, the company's stock experienced a setback as investors focused on the issue of cash sorting. However, there was a resurgence later in the year as signs emerged that the problem was diminishing and expectations grew for a reduction in interest rates by the Federal Reserve in 2024.
Currently trading at $64.36, the stock has seen a 23% decline over the past 12 months.
Schwab's Potential Breakthrough
Analysts' Optimistic Outlook
According to William Blair analysts Jeff Schmitt and Tyler Mulier, Schwab is finally showing signs of a breakthrough as the cash sorting issue subsides and client cash begins to flow in after the peak in interest rates. After months of stagnation below $60, the stock has risen to $67 and is predicted to gain momentum in the coming months due to various factors.
Stabilizing Cash Levels and Cost-Cutting Initiatives
One crucial factor that could contribute to Schwab's success is the stabilization of sweep account cash levels. This will enable the company to pay off its short-term borrowings. Additionally, Schwab's cost-cutting efforts, exemplified by the layoff of roughly 2,000 employees last year, will help keep expenses in check. The analysts also mention the possibility of share buybacks resurfacing in 2024. By combining strong EPS growth with an expansion of the forward price/earnings ratio to its historical range of 18 to 20, the stock is expected to make significant strides over the next 12-18 months.
Integration Efforts with TD Ameritrade
Investors eagerly anticipate updates on Schwab's ongoing efforts to integrate TD Ameritrade into its operations. As the largest custodian of assets for registered investment advisors, the successful integration of TD Ameritrade is of utmost importance. However, some advisors encountered difficulties when their accounts were migrated to Schwab's platform. This issue remains a focal point for investors seeking reassurance.
Client Asset Flows Deliver Insight
Analysts and investors will closely monitor Schwab's client asset flows as it serves as a key indicator of the company's performance. Historically, Schwab attracts tens of billions of dollars of net new assets on a monthly basis. However, last year saw a decline in this metric as retail customers and advisors of TD Ameritrade opted to move their assets elsewhere before the account migration. With a majority of former TD Ameritrade clients now on Schwab's platform, any remaining attrition should be minimal.
Ahead: A Clearer Future?
Wednesday's financial results will provide investors with an early glimpse into whether Schwab has successfully left behind the challenges of 2023.