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Will Discover Financial (DFS) Beat Earnings Estimates Again?

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We expect direct banking and payment services company, Discover Financial Services (DFS - Free Report) to beat expectations when it reports second-quarter 2014 earnings on Jul 22, 2014.

Why a Likely Positive Surprise?

Our proven model shows that Discover Financial is likely to beat earnings because it has the right combination of two key components.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is +0.77%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.

Zacks Rank: Discover Financial carries a Zacks Rank #2 (Buy). Note that stocks with Zacks Ranks #1, 2 and 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.  

The combination of Discover Financial’s Zacks Rank #2 (Buy) and +0.77% ESP makes us confident of an earnings beat in the coming week.

What's Driving the Better-Than-Expected Earnings?

An improvement in consumer spending, wallet share and credit quality trends are expected to lead to a positive earnings surprise in the quarter. Additionally, the introduction of new interest fixed and variable interest rates on student loan applications in the past quarter is expected to draw a greater number of students, thereby increasing Discover Financial’s student loan originations.

Moreover, the merchant acquiring agreement in association with Bangkok Bank should contribute positively to earnings. This is because the deal enables Bangkok Bank’s merchants to accept Diners Club International, Discover, BC Global, DinaCard and RuPay cards – all coming under the Discover Global Network    

The positive trend is seen in the trailing four-quarter average surprise of 4.46%, which was greatly aided by the 4.80% surprise in the last reported quarter. This was possible because Discover Financial was successful in increasing student loan originations and expanding its international foothold.

Other Stocks to Consider

Discover Financial is not the only stock looking up this earnings season. We also see likely earnings beats coming from these three companies in the same sector:

Credit Acceptance Corp. (CACC - Free Report) has Earnings ESP of +2.39% and a Zacks Rank #2.

Santander Consumer USA Holdings Inc. (SC - Free Report) has Earnings ESP of +3.23% and a Zacks Rank #3 (Hold).

World Acceptance Corp. (WRLD - Free Report) has Earnings ESP of +3.64% and a Zacks Rank #3.

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