Leading discount broker Charles Schwab reported earnings this morning, and the results were quite anemic thanks to the stock market's recent slump. The trading behaviors of its clients -- and the clients of competitors like E*Trade and Ameritrade -- are not likely to pick up again until the market substantively changes direction.

	Email this page Format for printing Reuse/Reprint
	Related Links Discount Broker Center Dueling Fools -- Schwab Stocks Fools Love -- E*Trade Ameritrade's Moment of Truth?
	Discussion Boards Ameritrade Charles Schwab E*Trade

By Paul Larson (TMF Parlay)
April 17, 2001

Feeling a little blue about the stock market's performance over the past few months and the almost daily barrage of negative economic news? Today brings a story that indicates you are not alone.

This morning, leading discount broker Charles Schwab (NYSE: SCH) reported a dramatic slowdown in earnings in the first quarter. A company's financial performance usually directly affects the price of its stock, but in Schwab's case the tail wags the dog as the overall stock market greatly affects the health of its business.

Revenue in the first quarter was $1.2 billion, down from the $1.7 billion the company recorded in the first quarter of 2000. The lion's share of the slowdown was due to decreased trading volume and the subsequent commission revenue it generates. Trading-related revenues were down a staggering 51% year-over-year in the first quarter. This is as good an indication as any that the public's interest in "playing the market" has greatly waned.

Even given the tough climate in the stock market, Schwab did manage to attract 280,000 new accounts in Q1, bringing the company's total to 7.6 million active accounts. Inflow to these accounts was also positive in the first quarter with some $31 billion worth of net new assets deposited at Schwab. Total assets held by Schwab clients, however, still contracted some 15% year-over-year to $806 billion as decreasing stock prices crunched the total value of many portfolios.

Pro forma net income at Schwab was $120 million in the first quarter, down 63% year-over-year from the $323 million the company earned in the first three months of 2000. The company was simply not able to cut expenses to the same extent that revenues dropped. Pro forma EPS was also down a similar amount, dropping to $0.08 per share from the $0.23 earned last year. The $0.08 was in line with the mean analyst estimate for the company but was the fourth straight quarter Schwab has reported a sequential decline in EPS.

Though these figures appear dour, it is worth noting that Schwab was faced with some nearly impossible year-over-year comparisons. With the stock market flying to all-time highs early last year, Schwab's revenue and earnings also hit new heights. Taking a longer-term view of Schwab's results, the company's revenue in the first quarter of this year is still double what it was in the first quarter of 1998.

Nevertheless, the takeaway from today's news is that the discount brokers -- including some of Schwab's competitors like E*Trade (NYSE: ET) and Ameritrade (Nasdaq: AMTD) -- are seeing their businesses get whacked by the stock market slump. The trading behaviors of their clients are not likely to pick up again until the market substantively changes direction.

Paul Larson's first trading account was with Schwab, but he doesn't own the stock. You can see Paul's complete stock holdings online. The Motley Fool is investors writing for investors.

Feedback about News & Commentary? Please send mail to news@fool.com.