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Shares of online stock broker The Charles Schwab Corporation (NYSE: SCHW) fell 8.8% as of 12:55 a.m. EDT on Tuesday, despite beating analysts’ expectations for the second quarter at both highs and lows.
At the start of the quarter, analysts expected Schwab to report earnings of $0.72 per share on revenue of $4.68 billion. In fact, Schwab earned $0.73 on revenue of $4.69 billion – and with higher revenue net interest margin of 2.03%.
Charles Schwab Q2 Earnings
So why doesn’t Schwab have any good news? First, the news was not as good as the above makes it sound. Turns out, Schwab’s profit of “$0.73” was just a pro forma number. The company’s profit, calculated using generally accepted accounting principles (GAAP), was actually just $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 worry investors, however, is the fact that after “reporting earnings,” Schwab management revealed in its post-earnings conference call that it is downsizing its banking operations to “keep the economy that we can generate’. own a bank.”
CEO Walt Bettinger specifically described a plan under which the company will hold more off-balance sheet customer deposits at its subsidiaries to reduce capital requirements imposed by regulators. Adding to investor concerns, the CEO warned that one consequence of this move could be greater earnings volatility in the company’s future.
Should this worry investors? I mean, it’s obvious is what they are worried about today – but should It?
It depends on. On the one hand, Schwab stock looks quite attractive today at 28 times earnings and expected long-term growth of 26%. Even if earnings become “volatile,” if Schwab can average 26% growth over the long term, that seems 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 holds positions in and recommends Charles Schwab. The Motley Fool recommends the following options: September 2024 $77.50 short calls on Charles Schwab. The Motley Fool has one disclosure policy.
Why Charles Schwab shares fell just 9% was originally published by The Motley Fool