It has been about a month since the last earnings report for Discover (DFS Quick QuoteDFS - Free Report) . Shares have lost about 4.5% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Discover due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Discover Financial Beats on Q1 Earnings, Hikes Dividend

Discover Financial Services reported first-quarter 2022 adjusted earnings of $4.22 per share, which beat the Zacks Consensus Estimate by 17.9%. However, the bottom line plunged 16% year over year.

DFS’s revenues — net of interest expenses — amounted to $2.9 billion, which improved 4% year over year. However, the top line missed the consensus mark by 2.5%.

The quarterly performance was driven by higher net interest income, improved net discount and interchange revenue and growth in loan fee income. Continued strong credit performance combined with sound contributions from the Digital Banking and Payment Services segments contributed to the upside. However, the benefits were partly offset by elevated operating costs and a net loss on equity investments amounting to $162 million.

Operational Update

Operating efficiency came in at 38.9%, which improved 20 basis points (bps) year over year in the first quarter.

Interest expenses of $257 million declined 19% year over year in the quarter under review.

Total operating expenses increased 5% year over year to $1.1 billion mainly due to a rise in marketing and information processing expenses.

Net income of Discover Financial plunged 22% year over year to $1.2 billion in the quarter under review.

Segmental Performance

Digital Banking Segment

The segment reported pre-tax income of $1.7 billion, which declined 15% year over year in the first quarter. The decline was due to increased provision for credit losses and elevated operating expenses, partly offset by higher revenue net of interest expense.

At the first-quarter end, total loans of $93.5 billion advanced 8% year over year. While credit card loans improved 10% year over year, private student loans grew 2% year over year. Meanwhile, personal loans dipped 1% year over year.

Net interest income rose 6% year over year to $149 million on the back of improved average receivables, favorable funding costs and reduced interest charge-offs.

Net interest margin came in at 10.85%, which improved 10 bps year over year in the quarter under review.

Payment Services Segment

The segment's pretax loss of $101 million came against the prior-year quarter’s pretax income of $52 million. Performance of the segment was hurt by reduced revenues stemming from a net loss on equity investments of $162 million. Nevertheless, the downside was partly offset by improved PULSE and Network Partners revenues.

Payment Services volume increased 2% year over year to $77.7 billion for the first quarter.

PULSE dollar volume dipped 1% year over year due to subsiding spend on debit products linked with the end of federal stimulus programs. While Diners Club volume climbed 22% year over year driven by recovery from COVID-induced adversities, better AribaPay volume led to 11% year over year rise in Network Partners volume.

Financial Position (as of Mar 31, 2022)

Discover Financial exited the first quarter with total assets of $107.4 billion, which slipped 6% year over year. The liquidity portfolio (comprising cash and cash equivalents and other investments but excluding cash-in-process) plunged 47% year over year to $14.9 billion.

Total liabilities of nearly $94 billion decreased 8% year over year. Meanwhile, total equity grew 11% year over year to $13.4 billion.

Share Repurchase Update

Discover Financial bought back shares worth $944 million in the first quarter. Shares of common stock outstanding decreased by 2.6% sequentially. Meanwhile, its board of directors has authorized a new share buyback program of $4.2 billion. The new one, replacing the previous program, will run till Jun 30, 2023, but can be ended at any time

Dividend Hike Announced

The board of directors announced a 20% hike in the quarterly dividend. The increased dividend of 60 cents per share will be paid out on Jun 9, 2022, to shareholders of record on May 26.

2022 Guidance

Concurrent with the first-quarter results, DFS revised its 2022 outlook for two of its metrics (net interest margin and net charge-offs). Meanwhile, the guidance for loan growth and operating expense remains unchanged from the prior one.

Net interest margin is estimated to witness improvement within 5-15 bps when compared with the first-quarter 2022 figure, while the previous guidance expected the metric to remain relatively unchanged from the 2021 figure.

The average net charge-off rate is projected to lie between 2.2% and 2.4%, compared with the prior outlook of 2.2-2.6%.

Loan growth is continued to be projected in high-single digits, while the mid-single digit rise forecast for total operating expenses also remain unchanged.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

Currently, Discover has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Discover has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.