Charles Schwab (NYSE: SCHW) shares were 5% higher following the company's Q2 earnings report which showed it beating analysts' expectations on the top and bottom line. Notably, the company's earnings increased by 42%, and it reported records in terms of revenues and profits.
This is largely due to higher interest rates which means that companies with large amounts of cash on their balance sheets, earn higher returns. In Schwab's case, it invests the cash in people's accounts into short-term securities. The 3-month US Treasury is yielding 2.5%, compared to 0% 2 years ago which is a major factor in Schwab's earnings growth. But, it's also clear that investors are treating this earnings surge as transitory based on Schwab's stock performance and valuation.
Inside the Numbers
In Q2, Charles Schwab reported $0.87 in earnings per share which was a sharp increase from $0.59 per share last year and above analysts' expectations of $0.81 per share. Revenue was up 13% to $5.1 billion which was slightly higher than consensus estimates of $5 billion.
While the beat in earnings was driven by growth in net interest income, the company saw an adverse impact from increased market volatility and the decline in asset prices. Typically, trading volumes fall during bear markets and continue a trend from the second quarter of 2021 as retail investors' favorite stocks and ETFs have suffered the bulk of the damage. Not surprisingly, growth in new accounts also suffered.
Overall, net interest income was up 31%. The company also saw a bigger than expected increase in earnings, although it wasn't enough to offset margin expansion. Compared to the previous quarter, pre-tax profit margins increased to 45% from 38%.
Due to the bear market, Schwab's total client assets dropped by 10% to $6.8 trillion. And, it only saw net new assets of $43.4 billion. Currently, the company has 33.9 million active brokerage customers and 2.3 million corporate retirement plan participants.
Overall, Schwab looks quite appealing given that it's continued to grow despite adverse circumstances. It's also clear that the Robinhood (Nasdaq: HOOD) threat has passed. Currently, the stock is cheaper than the market with a forward P/E of 12.9 and higher growth rates and juicer margins. The stock also pays a 1.3% dividend yield and has been increasing its payout by more than 10% over the last 5 years.