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Discover (DFS) Up 15% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Discover (DFS - Free Report) . Shares have added about 15% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Discover 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's Q1 Earnings Beat, Improve Y/Y

Discover Financial Services reported first-quarter 2021 adjusted earnings of $5.04 per share, beating the Zacks Consensus Estimate of $2.88 by a whopping 75%. Moreover, the bottom line rebounded from the year-ago quarter’s loss of 25 cents per share. The results were driven by a solid credit performance, impressive growth in sales and execution on operating and funding costs. This upside can also be attributed to a solid performance by its Direct Banking business.

Operational Update

In the reported quarter, the company’s revenues — net of interest expenses — dipped 3.2% year over year to $2.8 billion. However, the top line beat the Zacks Consensus Estimate by 1.3% on the back of its Direct Banking business. Total loans declined 7% year over year to $86.3 billion.

Interest expenses of $316 million decreased 45.9% year over year. Total operating expenses decreased 6.7% to $1 billion, driven by lower market and business development costs, information processing, and communication and professional fees.

Segmental Update

Direct Banking Segment

This segment’s pre-tax income came in at $2 billion against the year-ago quarter’s loss of $161 million. This is attributable to a decline in provision for credit losses and reduced operating expenses. However, the same was partly offset by lower revenue net of interest expenses.

Total loans dropped 7% year over year to $86.3 billion. Credit card loans fell 9% to $67.3 billion. Personal loans were down 9% while private student loans inched up 2%, both on a year-over-year basis. Net interest income slipped 3% year over year due to lower average receivables. Net interest margin was 10.75%, up 54 basis points from the year-ago quarter.

Payment Services Segment

Payment Services pre-tax income was $52 million in the quarter under review, down 37.3% from the year-earlier period due to the sale of an equity investment in the prior year. Payment Services volume was up 19% from the prior-year period.

PULSE dollar volume expanded 23% year over year, aided by stimulus funds distributed in January and March 2021 as well as higher average spend per transaction, driven by the pandemic. Diners Club volume contracted 24% from the year-earlier quarter due to the COVID-19 impact. Network Partners volume rose 38%, backed by AribaPay.

Strong Financial Position

Discover Financial’s total assets were worth $113.8 billion as of Mar 31, 2021, up 1.1% year over year. Total liabilities as of Mar 31, 2021 were $101.7 billion, down 1.2% year over year. Total equity was $12.1 billion on Mar 31, 2021, up 25.8% year over year.

Share Repurchase Update

In the first quarter, the company bought back shares worth $119 million. Shares of common stock outstanding dipped 0.2% from the previous quarter.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 11.15% due to these changes.

VGM Scores

At this time, Discover has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile 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. It comes with little surprise Discover has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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