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Why Is Discover Financial (DFS) Up 2.8% Since the Last Earnings Report?
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A month has gone by since the last earnings report for Discover Financial Services (DFS - Free Report) . Shares have added about 2.8% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? 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 drivers.
Discover Financial Beats on Q3 Earnings & Revenues
Discover Financial's third-quarter 2016 earnings of $1.56 per share beat the Zacks Consensus Estimate by 5.4%. The bottom line also improved 13% year on year.
The company’s revenues, net of interest expenses, grew 5.2% year on year to $2.3 billion. The top line also surpassed the Zacks Consensus Estimate of $1.8 billion by 28%. Net interest income grew almost 8.3% year over year to $1.8 billion, attributable to loan growth and higher net interest margin.
Total other expense increased a nominal 1.2% to $895 million as higher employee compensation and benefits were offset by a reduction in marketing and business development expenses, information processing and communication expenses, professional fees and other expenses.
Segment Update
Direct Banking Segment: This segment’s pre-tax income decreased $19 million or 2% from the year-ago quarter to $931 million. This was because higher net interest income was offset by lower other income, higher operating expenses and increased provision for loan losses.
Other income decreased 6% year on year to $476 million mainly due to increased promotional rewards. Provision for loan losses increased 34% to $445 million from the prior year due to a larger reserve build and higher net charge-offs.
Discover Financial’s credit card net charge-off rate increased 13 basis points (bps) year over year to 2.2%. The over-30 days’ delinquency rate increased to 1.87%, up 22 bps year on year. Net charge-off rates were higher due to expected seasoning of recent growth.
Total loans increased 5% year over year to $73.5 billion. Personal loans grew 16% year over year to $525 million. Credit card loans rose 4% year over year to $58 billion. Private student loans inched up 3% year over year. Excluding purchased student loans, however, private student loans grew 14%. Discover Financial’s total card sales volume grew roughly 1% year over year.
Net interest income grew 8.3% from the prior year to $1.8 billion due to loan growth and higher net interest margin. Net interest margin increased 37 bps year over year to 10%.
Expenses increased 2% year on year to $19 million, mainly due to increased marketing investments and higher regulatory and compliance staffing costs that partially offset savings from the closure of the mortgage origination business. Marketing expenses increased primarily due to card investments. Employee compensation increased mostly due to higher staffing levels driven in part by regulatory and compliance activities. However, Professional fees were lower than the prior year because of the completion of the look back related anti-money laundering remediation activities earlier this year.
Interest expense as a percent of total loans increased 12 bps year over year, primarily due to higher market rates and higher FDIC expense.
Payment Services Segment: Pre-tax income at Discover Financial’s Payment Services segment grew $6 million to $30 million year over year driven by lower expenses.
Payment Services transaction dollar volume fell 3% from the year-ago quarter to $44.6 billion. Transaction dollar volume from PULSE declined 6% year over year due to loss of some volume from a large debit issuer. Diners Club International’s volumes increased 12% year over year, largely due to continuous growth in Asia.
Financial Position
Discover Financial had total assets worth $90.5 billion as of Sep 30, 2016 compared with $85.5 billion as of Sep 30, 2015.
Total liabilities as of Sep 30, 2016 were $79.2 billion compared with $74.2 billion as on Sep 30, 2015. Total equity was $11.3 billion at the end of Sep 30, 2016 compared with $11.3 billion at the end of Sep 30, 2015. Discover Financial’s return on equity for the third quarter of 2016 was 23%.
Share Repurchase Update
During the third quarter of 2016, Discover spent approximately $582 million to repurchase 10.1 million shares of common stock. Diluted shares outstanding declined 2.5% year over year.
Outlook
The company remains focused pursuing new card accounts and wallet share gains with existing customers through investments in marketing and rewards and new card features. Total loan growth is expected to be in the company’s targeted range of 4-6% for 2016.
Management expects total expenses in 2016 to be relatively stable year over year . It stated that additional compliance staffing headcount and higher marketing investments are expected to be offset by savings tied with exiting the mortgage business in 2015 and reduced anti-money laundering look-back project costs in 2016.
Management also expects lower total other income year over year due to exit of the company’s mortgage origination business, decrease in protection products revenue and a higher credit card rewards rate, reflecting an stiff competitive environment in this space.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimate flatlined during the past month. There have been two revisions higher for the current quarter compared to two lower.
At this time, Discover Financial's stock has an subpar Growth Score of 'D', however, it is doing a bit better on the momentum front with an 'C'.The stock was allocated a grade of 'B' on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for value investors than momentum investors.
Outlook
The stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.
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Why Is Discover Financial (DFS) Up 2.8% Since the Last Earnings Report?
A month has gone by since the last earnings report for Discover Financial Services (DFS - Free Report) . Shares have added about 2.8% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? 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 drivers.
Discover Financial Beats on Q3 Earnings & Revenues
Discover Financial's third-quarter 2016 earnings of $1.56 per share beat the Zacks Consensus Estimate by 5.4%. The bottom line also improved 13% year on year.
The company’s revenues, net of interest expenses, grew 5.2% year on year to $2.3 billion. The top line also surpassed the Zacks Consensus Estimate of $1.8 billion by 28%. Net interest income grew almost 8.3% year over year to $1.8 billion, attributable to loan growth and higher net interest margin.
Total other expense increased a nominal 1.2% to $895 million as higher employee compensation and benefits were offset by a reduction in marketing and business development expenses, information processing and communication expenses, professional fees and other expenses.
Segment Update
Direct Banking Segment: This segment’s pre-tax income decreased $19 million or 2% from the year-ago quarter to $931 million. This was because higher net interest income was offset by lower other income, higher operating expenses and increased provision for loan losses.
Other income decreased 6% year on year to $476 million mainly due to increased promotional rewards. Provision for loan losses increased 34% to $445 million from the prior year due to a larger reserve build and higher net charge-offs.
Discover Financial’s credit card net charge-off rate increased 13 basis points (bps) year over year to 2.2%. The over-30 days’ delinquency rate increased to 1.87%, up 22 bps year on year. Net charge-off rates were higher due to expected seasoning of recent growth.
Total loans increased 5% year over year to $73.5 billion. Personal loans grew 16% year over year to $525 million. Credit card loans rose 4% year over year to $58 billion. Private student loans inched up 3% year over year. Excluding purchased student loans, however, private student loans grew 14%. Discover Financial’s total card sales volume grew roughly 1% year over year.
Net interest income grew 8.3% from the prior year to $1.8 billion due to loan growth and higher net interest margin. Net interest margin increased 37 bps year over year to 10%.
Expenses increased 2% year on year to $19 million, mainly due to increased marketing investments and higher regulatory and compliance staffing costs that partially offset savings from the closure of the mortgage origination business. Marketing expenses increased primarily due to card investments. Employee compensation increased mostly due to higher staffing levels driven in part by regulatory and compliance activities. However, Professional fees were lower than the prior year because of the completion of the look back related anti-money laundering remediation activities earlier this year.
Interest expense as a percent of total loans increased 12 bps year over year, primarily due to higher market rates and higher FDIC expense.
Payment Services Segment: Pre-tax income at Discover Financial’s Payment Services segment grew $6 million to $30 million year over year driven by lower expenses.
Payment Services transaction dollar volume fell 3% from the year-ago quarter to $44.6 billion. Transaction dollar volume from PULSE declined 6% year over year due to loss of some volume from a large debit issuer. Diners Club International’s volumes increased 12% year over year, largely due to continuous growth in Asia.
Financial Position
Discover Financial had total assets worth $90.5 billion as of Sep 30, 2016 compared with $85.5 billion as of Sep 30, 2015.
Total liabilities as of Sep 30, 2016 were $79.2 billion compared with $74.2 billion as on Sep 30, 2015. Total equity was $11.3 billion at the end of Sep 30, 2016 compared with $11.3 billion at the end of Sep 30, 2015. Discover Financial’s return on equity for the third quarter of 2016 was 23%.
Share Repurchase Update
During the third quarter of 2016, Discover spent approximately $582 million to repurchase 10.1 million shares of common stock. Diluted shares outstanding declined 2.5% year over year.
Outlook
The company remains focused pursuing new card accounts and wallet share gains with existing customers through investments in marketing and rewards and new card features. Total loan growth is expected to be in the company’s targeted range of 4-6% for 2016.
Management expects total expenses in 2016 to be relatively stable year over year . It stated that additional compliance staffing headcount and higher marketing investments are expected to be offset by savings tied with exiting the mortgage business in 2015 and reduced anti-money laundering look-back project costs in 2016.
Management also expects lower total other income year over year due to exit of the company’s mortgage origination business, decrease in protection products revenue and a higher credit card rewards rate, reflecting an stiff competitive environment in this space.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimate flatlined during the past month. There have been two revisions higher for the current quarter compared to two lower.
Discover Financial Services Price and Consensus
Discover Financial Services Price and Consensus | Discover Financial Services Quote
VGM Scores
At this time, Discover Financial's stock has an subpar Growth Score of 'D', however, it is doing a bit better on the momentum front with an 'C'.The stock was allocated a grade of 'B' on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for value investors than momentum investors.
Outlook
The stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.