Schwab Aims at Growing Trading Income, Higher Costs a Woe

On Jun 13, we issued an updated research report on The Charles Schwab Corporation SCHW. Its efforts to strengthen trading income should support profitability in the long run, despite chances of near-term revenue reductions. Mounting expenses remain a key concern.

Schwab is focused on augmenting trading revenues. In February, the company announced several initiatives including reducing its basic online equity and ETF trade commissions to attract potential clients. Basically this triggered a price war among the brokerage firms including TD Ameritrade Holding Corporation AMTD, Fidelity Investments Inc. and E*TRADE Financial Corporation ETFC.

While these efforts are likely to lower revenues in the near-term, they are aimed at strengthening Schwab's client base and competitive position in the market. Hence, these efforts will lead to a rise in trading income going forward.

Apart from this, management's aggressive efforts to increase client base in advisory solutions have been fruitful. Advice solution revenues have been rising for the last several years. Also, the average client assets have been witnessing a rising trend. The uptrend is expected to persist in the future as well.

Driven by such initiatives, analysts are optimist about the prospects of the company. The Zacks Consensus Estimate for 2017 has increased 1.9% over the last 60 days. Also, this Zacks Rank #3 (Hold) stock has gained 6.5% so far this year as against 2% decline for the Zacks categorized Investment Brokerage industry.



However, continued rise in operating expenses remains a major concern for Schwab. Costs related to compensation and regulatory spending should keep overall expenses high in the upcoming quarters.

Also, significant dependence on fee-based revenue streams is a near-term woe for Schwab. This, along with lower degree of capital intensity compared to its peers makes us apprehensive.

Stock that Warrants a Look

A stock in the same industry worth considering is Raymond James Financial, Inc. RJF. The company witnessed an upward earnings estimate revision of 1.4% for the current year, in the last seven days. So far this year, its shares have rallied 14.3%. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

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E*TRADE Financial Corporation ETFC: Free Stock Analysis Report
 
The Charles Schwab Corporation SCHW: Free Stock Analysis Report
 
TD Ameritrade Holding Corporation AMTD: Free Stock Analysis Report
 
Raymond James Financial, Inc. RJF: Free Stock Analysis Report
 
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