Charles Schwab (SCHW) stock sunk this week after the financial services giant reported earnings and said it would be pausing its share buyback program in order to focus on paying down debt. However, even at this lower share price, there’s not enough to convince me to buy this stock, with management banking on interest rate cuts to boost the net interest margin (NIM) from 2.03% to 3%. That’s why I’m neutral on SCHW stock.
Charles Schwab Scares Investors
Charles Schwab is a behemoth of the stockbroker world, but its Q2 results and commentary appear to have scared investors away from its own stock. That’s not to say there weren’t any positives. Charles Schwab reported mixed results for Q2, with earnings slightly above analyst expectations and revenue falling marginally short.
The firm’s adjusted earnings per share (EPS) came in at $0.73, marginally beating the consensus estimate of $0.72, though it represented a slight decrease from $0.74 in Q1 and $0.75 in Q2 2023. Net revenue for Q2 was $4.69 billion, just below the average analyst estimate of $4.7 billion. This figure was down from $4.74 billion in the previous quarter but up from $4.66 billion a year ago.
The brokerage platform saw 990,000 new users — slightly below estimates of 1.04 million — with Charles Schwab now boasting 35.6 million active users. Additionally, Schwab’s total net new assets continue to move in the right direction, reaching $74.2 billion, up from $72 billion in Q2 2023 but down from $88.2 billion in Q1 2023.
Meanwhile, net interest revenue was $2.16 billion, slightly under the consensus of $2.18 billion and down from the previous quarter and the same period last year, potentially due to “rate-sensitive client cash realignment activity.” The NIM grew one basis point to 2.03%.
Of course, none of this sounds particularly concerning. However, management has seemingly scared investors by announcing the pausing of its share buyback program in order to focus on debt repayments.
“There is one additional consideration right now, which is to the extent that we have outstanding supplemental borrowing, we may choose to utilize some of the liquidity we’d otherwise use for buybacks to reduce some of that bank-level debt,” CFO Peter Crawford said during the results presentation.
This halting of share buybacks naturally increases the downward pressure on the stock, with more shares likely to be in circulation than investors had anticipated. However, Crawford emphasized that prioritizing debt reduction over stock buybacks would accelerate the paydown of supplemental borrowings. This strategy aims to enhance the company’s NIM and earnings growth over time.
Looking at SCHW Stock’s Valuation
From a valuation perspective, Charles Schwab stock is very interesting. It’s currently trading at 20.9x non-GAAP forward earnings, putting it at a premium to the market. However, analysts are rather bullish with their growth expectations for the stock, with the price-to-earnings (P/E) figure falling to 15.5x in 2025 and 12.7x in 2026. This rapid pace of growth leads us to a price-to-earnings-to-growth (PEG) ratio of 0.93x — a discount to the sector.
However, there are some concerns about the forecasting, namely Schwab’s own forecasting, which tends to influence other analysts. The company believes that upcoming interest rate cuts will help push the firm’s NIM up from 2.03% to around 3% by the end of 2025. This would be complemented by the aforementioned paying down of debt.
“We could see our NIM reach the mid-2.20s in Q4 on its way to approaching 3% by the end of 2025, which we believe will support adjusted earnings per share in the middle of the $0.80 to $0.90 range we outlined at the beginning of the year,” Crawford said in the earnings presentation.
This could be optimistic, generally, but there are additional market forces to be wary of. One of those forces is a Donald Trump presidency. There is plenty of talk that Trump’s import tariff, tax cuts, defense spending, etc., would be inflationary and would, in turn, cause Jerome Powell, the Chair of the Federal Reserve, to pause rate cuts.
Is Charles Schwab Stock a Buy, According to Analysts?
On TipRanks, SCHW comes in as a Moderate Buy based on 10 Buys, three Holds, and one Sell rating assigned by analysts in the past three months. The average Charles Schwab stock price target is $81.23, implying 30.45% upside potential.
The Bottom Line on Charles Schwab Stock
Charles Schwab is a behemoth of the personal wealth and investment world, and its client growth in Q2 was impressive and potentially overlooked. However, I’m a little concerned by the company’s reliance on falling interest rates in order to boost its NIM, given the potentially inflationary impact of a Donald Trump presidency. While the PEG ratio looks very attractive, I’m keeping my powder dry for now.
