Charles Schwab (SCHW) has been trading in the range of $18.94 – $22.44 over the past 30 days, showing support around $20.50 and resistance in the $22.20 range.
Our indicators give a bearish view on SCHW after Tuesday’s earnings announcement.
EARNINGS NEWS
SCHW’s short-term bearish technical indicators are supported by weak fundamentals, as well. The company’s income rose less than two percent on greater revenue from asset management and administration fees and higher interest revenue.
However, SCHW said trading activity remains lower than expected, and that in the first quarter results were hurt by an increase in incentive payments, accelerated contributions to employee health savings accounts and changes to incentive award vesting for employees who are eligible for retirement.
For the three months ended June 31, Schwab posted net income of $256 million, down from $275 million a year ago (on a per-share basis net income declined to 18 cents). Revenue rose, to $1.34 billion from $1.30 billion, with revenue from asset management and administration up 14 percent, to $572 million. Chief Financial Officer Joe Martinetto said the company expects to report full-year earnings per share in the mid $.70 range, with Wall Street expecting profit of 74 cents per share for the year.
SCHW P/E stands at 30.43, well above both the industry average of 15.33 and the S&P 500 average of 16.70. The stock is currently trading at its intrinsic value of $21.11, which suggests that the stock is fairly valued at these levels. SCHW’s current Price/Sales ratio, 5.63, is above the industry average of 2.79, and its beta of 1.61 implies higher volatility with respect to the S&P 500. SCHW’s Total Debt/Equity is 16.60 and is acceptable for our model. The company pays 0.24 or 1.10 dividend yield.
OPTIONS STRATEGY RECOMMENDATION
Technical and fundamental indicators both show a short-term bearish signal for SCHW.
Investors should consider the following debit put spread:
Buy August 2013 21 Puts at $0.70 and sell the August 2013 20 Puts at $0.30.
The net debit to start is $0.40, and we recommend holding until spread price reaches $0.90. This strategy will allow you to collect time premium for out of the money short puts and decrease the overall cost of the initial investment.
