Will Schwab Earnings Rise With Stocks at Record Highs?

Charles Schwab (SCHW 0.67%) will release its quarterly report next Tuesday, and investors aren't expecting a blowout quarter for the discount brokerage company. Yet with the stock trading near five-year highs, there's rising optimism that the company has put its worst days behind it, and that Schwab earnings could easily rise considerably from here.

As a broker, Schwab benefits from interest in the stock market, yet even though stocks have moved dramatically higher in recent years, they've done so without the usual chorus of retail investors getting back into the market. How can the broker engineer a comeback? Let's take an early look at what's been happening with Charles Schwab over the past quarter and what we're likely to see in its quarterly report.

Stats on Charles Schwab

Source: Yahoo! Finance.

How will Schwab's earnings climb from here?
Analysts haven't made many changes in recent months to their earnings calls for Schwab, boosting their June quarter estimates by a penny per share but keeping their full-year 2013 and 2014 calls unchanged. The stock, though, has risen considerably, jumping 27% since early April.

We've already gotten a hint of how Schwab has been performing from its monthly activity reports. In May, for instance, Schwab saw a net decrease in new assets of $1.9 billion, with a single mutual-fund clearing services client accounting for a $10.3 billion outflow. Schwab anticipates more than $60 billion in additional outflows from this client in the future. Yet overall, total client assets reached a record $2.11 trillion, and daily average trades among clients rose 8% from April and 17% from the year-ago month, showing strength in customer activity.

The problem for Schwab, though, is that its competitors have seen similarly strong performance lately. TD AMERITRADE (AMTD) weighed in with a 9% increase in daily average revenue trades in May, posting its best level in a year as it has gone head-to-head with Schwab with their similarly sized offerings of commission-free ETFs. Meanwhile, shares of E*TRADE Financial (ETFC) hit a 52-week high earlier this week, as the company rode on its own success with a 15% gain in trades from May. As the industry has gotten more cutthroat, brokers have been fighting to boost business, giving out expensive incentives to draw new customers in an effort to capture long-term relationships.

Just as important for Schwab, though, is the interest rate environment. Schwab has lost money having to subsidize its money market mutual fund offerings for some time, as rock-bottom short-term rates have made extraordinary measures necessary to keep money market rates from going negative. As some begin to foresee a move higher for rates, the corresponding boost to Schwab earnings from not having to provide fund subsidies could help the stock climb higher.

In Schwab's earnings report, look for signs of how its expansion of its commission-free ETF menu earlier this year has done in bringing in new customers. With ETFs continuing to grow, staying strong in that niche could give Schwab earnings power it might not otherwise have.

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