SCHW reports Q1 earnings April 15 – Simple Bearish Play Into Event – Define Risk

by Dan April 13, 2011 8:18 am • Commentary

EVENT: company reports Friday morning Apr 15th before the open.

-implied move in the options market is about 3% in-line with the approximate  average move over the last 8 qtrs of about 3%.


-stock is up 6.5% ytd slightly outpacing the market gains for the year, but OFF ~7.5% from the near 52 week highs made in February.

-Wall Street analyst community is fairly mixed on the name with 12 buys, 10 holds and 1 sell, with an average 12 month price target of about $20.75.

-Technically the stock is sitting on a massive trend-line dating back to the Sept 1, 2010 low.  A test and breach of that trend-line could see the stock sitting on a key support level of ~17.00 which also serves as what appears to be the neckline of an almost completed head and shoulders top formation. The left shoulder formed in Jan, the head formed in FEB and now the right shoulder in APR.

1 yr

-Longer term though, the chart has a lot of room over head if it can finally get through the $20 level. In a raging Bull Market, which we may very well be in the throws of, (that really hurt to say) this stock will perform in-line with slightly lagging financial sector which will very likely start to outperform.

3 yr


-company recently announced February business trends on March 14 and saw a number of analysts raise estimates into Q even-though they saw them to be fairly mixed:

Barclays Capital March 14, 2011:  (Analyst has a Neutral rating and $19.00 price target)

SCHW’s February monthly metrics were somewhat weaker than our expectations. Reported total trading activity was sequentially weaker (mostly driven by non commission trades), but ahead of our published estimates, and net new assets and net brokerage account additions were running below our quarterly pace estimates. As a result of the better trading volumes, we are raising our 1Q11 EPS estimate from $0.17 to $0.18, driven by an upwardly revised DARTs estimate (+21% vs. +9% previously).

Credit Suisse Analyst who has an Outperform and a 19.50 price target had a slightly more bullish take on the results: Mar 14, 2011:

Charles Schwab provided an update on February business trends. Results at the core were again strong for the company—net new asset generation and new account growth remained healthy, supported by solid organic growth and continued tailwind of equity market appreciation. Trading activity pulled back from a seasonally stronger January. Following this morning’s results, we are raising our first quarter/full year 2011 estimate to $0.18/$0.79 (old: $0.16/$0.77) and reiterate our Outperform rating. Bottom line: February results were affirmative of an improving operating environment for top-line growth at Schwab. We continue to like the asset gathering story and see significant EPS power realization as macroeconomic conditions heal, retail engagement improves and short-term interest rates ultimately rise.

-SCHW also recently announced the acquisition of OptiosnExpress and online Options broker for $1 billion and they see the deal closing in 3q11 and being mildly accretive in the first year based on revenue synergy assumptions of ~$80 million.

-Most analysts were generally positive on the deal and thought that they did not overpay for the asset.

Bank Of American Merrill Lynch Analyst who has a Buy and a 12 month price target of $24 wrote the following on March 22, 2011:

Deal increases SCHW exposure to derivatives market The deal, which is subject to shareholder and regulatory approval and other closing conditions and is expected to close 3Q11, is expected to increase SCHW retail options market share by ~70%. In our view over time SCHW should benefit from greater volumes of more profitable revenue trades—higher options fees more than offset the impact of repricing OXPS equity trades to SCHW price points—as existing customers gain access to OXPS’ trading platform. The move also gives SCHW access to the faster-growing derivatives market where traders tend to be more active.

MY VIEW: Analyst community seemed to be fairly positive on Jan and Feb Business trends as they were reported and on the Options Express acquisition, so that leaves us to figure out what March volumes and customer acquisitions looked like.  But I think with the stock trading near 52 week highs we will need a beat and raise to keep the stock going higher near term.  I am obviously Bearish on the market and think that we could be in for a rocky few months as our markets grapple with the end of quantitative easing and a whole host of other problems that they appear to be neglecting.

-I have to think that even with the volatility that we saw mid last month that a lot of investors sat on their hands and didn’t trade, which is fairly consistent with what I broadly witnessed from institutional options traders. Additionally Q2 tends to be a weaker period as it relates to volumes, so I would expect a bit of caution, especially in a period when they are trying to get regulatory approval for their OptionsExpress deal.

-Stock is not exactly cheap trading at ~22x the consensus 2011 earnings estimate and vs peers like AMTD that trade at ~19x 2011 estimate, although with slightly lower estimates growth.


TRADE: Near Term Bearish Play into Earnings- Define Risk

SCHW (Stock ref 18.25) Buy May 17 Put for ~.25

Break-Even on May Expiration:

Downside: stock btwn 16.75 and 17.00 lose up to .25, stock above 17 lose .25 (or less than 1.5% of underlying)

-Best Case: stock 16.75 or lower (down 8%) you make money.

TRADE RATIONALE: These puts look dollar cheap to me, and if you feel as I do that there is currently a lot of good news in the stock, than based on the technicals the stock could easily pull back to 17.  If it does that after earnings and with a month left to May expiration,  than I will look to turn this trade into a Put Spread by selling the lower strike May 16 Put and lock in some gains.  Also I am looking to may as I feel like an 8% move by Friday to the downside not that likely, but if it does start to head south you will want to give this some time to play out.