Schwab Expects Costs to Rise - Analyst Blog
09 Mai 2011 - 7:24PM
Zacks
Last week, Charles Schwab Corp. (SCHW)
announced its expectation for capital spending on client-related
initiatives to increase approximately 40% in 2011 over 2010.
The company increased its earlier projection of 35% increment
mentioned in 2010 annual report filed at the end of February 2011
to 40%, driven by anticipated increase in spending on software,
equipment related to computer systems and leasehold
improvements.
Specifically, Schwab’s spending plan includes significant
improvement in service areas like fixed-income, global investing,
mobile and tablet solutions, and advisor-focused technology,
coupled with advancement of index-and-ETF-based 401(k) and
Independent Branch Services initiatives.
In 2010, Schwab's capital expenditures were $127 million, or 3%
of net revenue. Based on current assumptions, spending is expected
to climb by more than $50 million to $178 million in 2011.
According to Schwab, if low-interest rate environment persists,
constrained growth in net interest revenue with the erosion of
asset management fees will be recorded in the forthcoming
quarters.
The company’s initiatives to enhance growth through investments
in the coming years will help it sustaining the better revenue over
the long term with a strong client network.
As a part of growth initiative, in March 2011, Schwab had
announced an all-stock deal to acquire optionsXpress
Holdings Inc. (OXPS) for $1.0 billion. Under the
agreement, the company will offer 1.02 shares for each share of
optionsXpress.
The deal is valued at $17.91 per share or 17% premium to the
closing price of optionsXpress’ stock as of March 18. The company
anticipates the deal to be modestly accretive and expect synergies
worth $80 million in the first full year of combined
operations.
Earnings Recap
Schwab’s first-quarter 2011 earnings came in at 20 cents per
share, a penny ahead of the Zacks Consensus Estimate of 19 cents.
This also compares favorably with the year-ago quarter’s earnings
of 11 cents. The results benefited from improved revenue and
increase in interest-earning assets. Additionally, fall in
non-interest expenses was also a positive for the company.
Our Take
While focus on lower-cost capital structure will sustain better
results in the upcoming quarters, Schwab’s financials will continue
to be impacted by lower trading activity and volatile interest
rates. However, after the completion of the optionsXpress, the
company’s top line will benefit from increased trading in
derivatives and capital spending initiatives will augment further
revenue growth.
CharlesSchwab currently retains a Zacks #3 Rank, which
translates into a short-term Hold rating. Moreover, considering the
fundamentals, we maintain our long-term Neutral recommendation on
the stock.
OPTIONSXPRESS (OXPS): Free Stock Analysis Report
SCHWAB(CHAS) (SCHW): Free Stock Analysis Report
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