Back to top

Image: Bigstock

Why Discover Financial (DFS) is Likely to Post Q4 Earnings Beat

Read MoreHide Full Article

Discover Financial Services (DFS - Free Report) is set to continue earnings beat streak for fourth-quarter 2021, whose results are set to be released on Jan 19, after the closing bell.

In the last reported quarter, the digital banking and payment services company’s adjusted earnings per share of $3.54 beat the Zacks Consensus Estimate of $3.42, primarily due to new account growth and strong credit performance. Yet, the results were partly offset by escalating costs.

Let’s see how things have shaped up prior to the fourth-quarter earnings announcement.

Trend in Estimate Revision

The Zacks Consensus Estimate for fourth-quarter earnings per share of $3.61 has witnessed six upward revisions and one downward movement by firms in the past 30 days. This estimate is indicative of a 39.4% increase from the year-ago reported figure. Similarly, the Zacks Consensus Estimate for fourth-quarter revenues is pegged at $3 billion, suggesting a jump of 6.1% from the year-ago reported figure.

Discover Financial beat earnings estimates in each of the trailing four quarters, delivering an average of 34.7%. This is depicted in the graph below.

What the Quantitative Model Suggests

Our proven model predicts an earnings beat for Discover Financial this time around as well. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat.

Earnings ESP: Earnings ESP for the company is currently +4.74%. This is because the Most Accurate Estimate is pegged at $3.78 per share, higher than the Zacks Consensus Estimate of $3.61. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.  

Zacks Rank: Discover Financial currently holds a Zacks Rank #3.

Factors Driving Better-Than-Expected Earnings

The company’s fourth-quarter results are likely to reflect improved sales volume on account of solid performances of retail and travel and entertainment businesses. New account growth might have contributed to earnings in the to-be-reported quarter. The gradual economic recovery and new account growth are expected to have driven loan growth in the fourth quarter, which, in turn, must have led to higher loan fee income. The Zacks Consensus Estimate for loan fee income is pegged at $117 million, indicating a rise from the prior-year reported number of $110 million.

Quite obviously, loan growth will be accompanied by higher net interest income. Moreover, reduced funding costs and lower interest charge-offs are likely to have boosted net interest income. The consensus mark for the same is pegged at $2,456 million, signaling a jump from the prior-year quarter’s $2,377 million.

Consequently, DFS’ allowance for loan losses might have improved on the back of better economic conditions, continued strength in credit performance and improved delinquency trends. The Zacks Consensus Estimate for allowance for loan losses suggests a decline of 17.3% from the year-ago quarter.

The Digital Banking and Payment Services segments of Discover Financial are likely to have contributed to fourth-quarter results. While the Digital Banking segment may have gained on the back of higher net interest income and protection products revenues, increased transaction processing revenues are likely to have driven Payment Services’ performance. The consensus mark for income before taxes across the Digital Banking segment indicates a 36.2% improvement from the prior-year reported figure. Meanwhile, the same for the Payment Services segment indicates 112.5% year-over-year growth.

Other Stocks That Warrant a Look

Here are some other companies from the Finance space that you may also want to consider, as our model shows that these too have the right combination of elements to post an earnings beat in the upcoming quarterly reports: American International Group, Inc. (AIG - Free Report) , Marsh & McLennan Companies, Inc. (MMC - Free Report) , and American Express Company (AXP - Free Report) .

American International Group has an Earnings ESP of +4.88% and a Zacks Rank of 2. AIG is scheduled to report fourth-quarter results on Feb 16. You can see the complete list of today’s Zacks #1 Rank stocks here.

Marsh & McLennan has an Earnings ESP of +2.76% and is a Zacks #2 Ranked player. MMC is scheduled to release fourth-quarter results on Jan 27.

American Express has an Earnings ESP of +2.72% and a Zacks Rank #3. AXP is scheduled to release quarterly earnings on Jan 25.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.