Strategic investors love to look over stocks after they have taken a major dive. Each and every earnings season brings companies in the S&P 500 which find out that their shares were slaughtered because of their earnings reports and guidance. Some of these battered stocks end up as great opportunities in overdone sell-off reactions. Others look that way on the surface, but the real story looks much worse than an overdone drop after you did deeper into the real fears behind the panic selling.
The Charles Schwab Corporation (NYSE: SCHW) has so far been the biggest major disappointment of the major U.S. financial services sector. It has to be a great time to buy, right? Maybe, but it doesn’t fit the bill and feel right to expect a sudden major recovery.
On a personal note here, I have been perusing financial stocks after exiting a rival’s preferred shares and holding others. I was looking at the drop in Schwab and have decided to avoid jumping into this two-day stock implosion. The three-fold reasoning is fairly simple. Despite nearly a 20% drop in just two trading days, Schwab’s problems sound like they will be worked out over time rather than immediately in one big write-down. The second issue is that the muted reports coming will not allow Schwab to screen as a “cheap” stock. The third issue is that Schwab had a similar drop in 2023 and things took over a half-year before the stock recovery kicked in.
One big admission has to be considered here. This drop may actually be a gift for those with the stones to jump in after the worst drop in over a year. It’s also very possible that Schwab’s board or management take note of this drop and come to the realization that they better just bite the bullet and get the coming losses over with.
THE ACTUAL REACTION
Charles Schwab shares closed down about 10% at $67.43 on Tuesday’s post-earnings reaction. While the stock was indicated down another 0.6% at $67.00 on Wednesday’s very early trading indications, the wave of downgrades and continued sour mood had the stock down more than 7% at $62.50 in late-day trading on Wednesday. And even after this large drop Schwab’s market capitalization was still $113 billion.
THE REPORT
As for some real numbers, Schwab’s revenue of $4.69 billion was up only about 1% from a year ago. The earnings of $0.73 per share was down about 3%. These numbers should have been fine, but Schwab’s earnings power has been shrinking for about 5 years. It still has a somewhat expensive earnings multiple of nearly 20-times and its 1.5% dividend yield is modest (at best). And for support when problems arose last year, the chart tested a low of $50 in three separate waves.
Even with its client-base assets hitting a record $9.4 trillion, active brokerage accounts rose less than 1% and the total number of bank accounts rose just 2%. Schwab’s revenue from interest was down a worse-than-expected 6% to $2.16 billion.
FROM BANK TO NON/LESS-BANK
And looking ahead, Schwab is planning to shrink its own banking efforts in favor of TD Bank. The company still has many longer dated loans with below market rates, and those loans are underwater. These are to be shrunk gradually and Schwab may pay down some higher interest debt while shortening some of its loan duration. This is very much simplified because there is no need for yet another earnings recap. It just means that this may be slow bleed rather than a rapid injury and rapid recovery.
ANALYSTS SAY BYE-BYE!
Wall Street isn’t exactly coming to the defense and aid of one the other most well-known financial stocks. Numerous cuts have already been seen from analysts in the last 24 hours:
- BofA Securities Underperform) and target cut to $66 from $72.
- Barclays (Equal-Weight) cut its target to $68 from $77.
- Deutsche Bank (Buy) cut its target to $79 from $84.
- TD Cowen downgraded Schwab to Hold from Buy and cut its target to $71 from $88.
Unfortunately for the team at Keefe Bruyette & Woods, they had just raised Schwab’s rating to Outperform from Market Perform and had raised its target to $84 from $76 about a week before earnings. That call will likely be unwound soon.
CONCLUSION
Schwab’s stock should ultimately recover. And this pullback may be creating the start of a great entry point for long-term investors who invest in companies and brands that they like to use. That day just isn’t so obvious today and things might have to get worse before they can get better. This is a position that may make more sense for new investment dollars. It just does not look like that is the case at the present time.
