Shares of online stockbroker The Charles Schwab Corporation (NYSE: SCHW) tumbled 8.8% through 12:55 p.m. EDT Tuesday despite beating analyst forecasts for the second quarter on both the top and bottom lines.
Heading into the quarter, analysts expected Schwab to report a $0.72 per-share profit on sales of $4.68 billion. In fact, Schwab earned $0.73 on sales of $4.69 billion — and with a bigger net-interest margin of 2.03%.
Charles Schwab Q2 earnings
So why is Schwab down on good news? Well, for one thing the news wasn’t quite as good as the above makes it sound. Turns out, Schwab’s “$0.73” profit was only a pro forma number. The company’s earnings as calculated according to generally accepted accounting principles (GAAP) were actually only $0.66 per share.
That was still $0.02 better than Schwab earned a year ago, but it’s a lot smaller than the headline figure.
What really seems to have investors worried, though, is the fact that after “reporting earnings,” Schwab management proceeded to reveal in its post-earnings conference call that it’s shrinking its banking business to “protect the economics we’re able to generate from owning a bank.”
Specifically, CEO Walt Bettinger described a plan whereby the company will hold more customer deposits off-balance sheet with its subsidiaries, in order to reduce the capital requirements that are imposed by regulators. Adding to investor concerns, the CEO warned that one effect of this move could be more earnings volatility in the company’s future.
Is Schwab stock a buy?
Should this worry investors? I mean, obviously it is worrying them today — but should it?
That depends. On the one hand, Schwab stock looks pretty attractive today at 28 times earnings and a 26% projected long-term growth rate. Even if earnings get “volatile,” if Schwab can average 26% long-term growth, that looks like a good valuation to me. On the other hand, if “volatility” means too many more quarters like this last one, where earnings grow just 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 has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Charles Schwab. The Motley Fool recommends the following options: short September 2024 $77.50 calls on Charles Schwab. The Motley Fool has a disclosure policy.
Why Charles Schwab Stock Just Dropped 9% was originally published by The Motley Fool
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