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Discover (DFS) Up 5.4% 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 5.4% 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 the most recent earnings report in order to get a better handle on the important drivers.
Discover Financial Q4 Earnings Beat on New Account Growth
Discover Financial Services reported fourth-quarter 2021 adjusted earnings of $3.64 per share, which outpaced the Zacks Consensus Estimate of $3.61. The bottom line also improved 41% year over year.
Based in Riverwoods, IL, DFS’ revenues — net of interest expenses — inched up 4% year over year to $2,936 million. Yet, the top line missed the Zacks Consensus Estimate of $2,997 million.
The strong fourth-quarter earnings were supported by a solid performance of the Digital Banking business. Increased sales, new account growth and strong credit performance were major positives. Yet, the positives were partially offset by escalating operating costs.
Q4 Operational Update
Operating efficiency declined to 44.7% for fourth-quarter 2021 from 45.2% in the year-ago period.
Interest expenses plunged to $259 million for the quarter under review from $383 million a year ago.
Total operating expenses escalated to $1,312 million from $1,278 million a year ago due to a rise in costs related to marketing, and business development and professional fees.
Net income increased to $1,067 million for the December quarter from $799 million a year ago.
Q4 Segmental Update
Digital Banking Segment
The segment’s pre-tax income of $1,458 billion surged 47% from $991 million a year ago. The improvement can be attributed to reduced provision for credit losses and increased revenues, net of interest expense. Yet, the same was partly offset by 3% elevated operating costs.
Total loans inched up 4% year over year to $93,684 million at fourth quarter-end. Likewise, credit card loans increased 4% year over year to $74,369 million. While personal loans fell 3% year over year, private student loans grew 2% year over year.
Net interest income advanced 4% year over year to $2,483 million, courtesy of favorable funding costs, increased average receivables and reduced interest charge-offs.
Net interest margin improved 18 basis points year over year to 10.8% for the quarter under review.
Payment Services Segment
The segment reported a pre-tax loss of $97 million against the prior-year quarter’s income of $24 million. An unrealized loss on equity investments affected the segment.
Payment Services volume expanded 19% year over year to $83,387million for the fourth quarter.
PULSE dollar volume rose 18% year over year on the back of expansion of all debit products resulting from economic recovery, in turn leading to improved spending. Diners Club volume improved 17% year over year, following revival from COVID-induced adversities. Network Partners volume climbed 29% year over year, attributable to improved AribaPay volume.
Financial Position (as of Dec 31, 2021)
Discover Financial exited the fourth quarter with total assets of $110,242 million, which declined 2% year over year. The liquidity portfolio (comprising cash and cash equivalents and other investments but excluding cash-in-process) of $14,959 million at fourth quarter-end declined 39% year over year.
Total liabilities were $96,834 million, reflecting a decline of 5% year over year.
Meanwhile, total equity increased 23% year over year to $13,408 million.
Share Repurchase and Dividend
In the December quarter, the company bought back shares worth $773 million. Shares of common stock outstanding dipped 2.2% sequentially.
For the fourth quarter, DFS declared a dividend of 50 cents per share, in line with the previous quarter. It will be paid out on Mar 3, 2022 to shareholders of record on Feb 17, 2022.
Outlook
DFS’ integrated digital banking and payments model as well as ongoing economic recovery buoyed the company’s results. Its new account growth in 2021 and resultant contribution to loan growth will likely drive 2022 results. The company expects loan growth for 2022 in high-single digits. Net interest margin for 2022 is expected to be relatively in line with the 2021 figure. Yet, total operating expenses are likely to rise in mid-single digits, which might put pressure on the bottom line. The average net charge-off rate for 2022 is expected within 2.2-2.6%, indicating an increase from 1.8% in 2021.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review.
VGM Scores
Currently, Discover has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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.
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.
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Discover (DFS) Up 5.4% Since Last Earnings Report: Can It Continue?
It has been about a month since the last earnings report for Discover (DFS - Free Report) . Shares have added about 5.4% 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 the most recent earnings report in order to get a better handle on the important drivers.
Discover Financial Q4 Earnings Beat on New Account Growth
Discover Financial Services reported fourth-quarter 2021 adjusted earnings of $3.64 per share, which outpaced the Zacks Consensus Estimate of $3.61. The bottom line also improved 41% year over year.
Based in Riverwoods, IL, DFS’ revenues — net of interest expenses — inched up 4% year over year to $2,936 million. Yet, the top line missed the Zacks Consensus Estimate of $2,997 million.
The strong fourth-quarter earnings were supported by a solid performance of the Digital Banking business. Increased sales, new account growth and strong credit performance were major positives. Yet, the positives were partially offset by escalating operating costs.
Q4 Operational Update
Operating efficiency declined to 44.7% for fourth-quarter 2021 from 45.2% in the year-ago period.
Interest expenses plunged to $259 million for the quarter under review from $383 million a year ago.
Total operating expenses escalated to $1,312 million from $1,278 million a year ago due to a rise in costs related to marketing, and business development and professional fees.
Net income increased to $1,067 million for the December quarter from $799 million a year ago.
Q4 Segmental Update
Digital Banking Segment
The segment’s pre-tax income of $1,458 billion surged 47% from $991 million a year ago. The improvement can be attributed to reduced provision for credit losses and increased revenues, net of interest expense. Yet, the same was partly offset by 3% elevated operating costs.
Total loans inched up 4% year over year to $93,684 million at fourth quarter-end. Likewise, credit card loans increased 4% year over year to $74,369 million. While personal loans fell 3% year over year, private student loans grew 2% year over year.
Net interest income advanced 4% year over year to $2,483 million, courtesy of favorable funding costs, increased average receivables and reduced interest charge-offs.
Net interest margin improved 18 basis points year over year to 10.8% for the quarter under review.
Payment Services Segment
The segment reported a pre-tax loss of $97 million against the prior-year quarter’s income of $24 million. An unrealized loss on equity investments affected the segment.
Payment Services volume expanded 19% year over year to $83,387million for the fourth quarter.
PULSE dollar volume rose 18% year over year on the back of expansion of all debit products resulting from economic recovery, in turn leading to improved spending. Diners Club volume improved 17% year over year, following revival from COVID-induced adversities. Network Partners volume climbed 29% year over year, attributable to improved AribaPay volume.
Financial Position (as of Dec 31, 2021)
Discover Financial exited the fourth quarter with total assets of $110,242 million, which declined 2% year over year. The liquidity portfolio (comprising cash and cash equivalents and other investments but excluding cash-in-process) of $14,959 million at fourth quarter-end declined 39% year over year.
Total liabilities were $96,834 million, reflecting a decline of 5% year over year.
Meanwhile, total equity increased 23% year over year to $13,408 million.
Share Repurchase and Dividend
In the December quarter, the company bought back shares worth $773 million. Shares of common stock outstanding dipped 2.2% sequentially.
For the fourth quarter, DFS declared a dividend of 50 cents per share, in line with the previous quarter. It will be paid out on Mar 3, 2022 to shareholders of record on Feb 17, 2022.
Outlook
DFS’ integrated digital banking and payments model as well as ongoing economic recovery buoyed the company’s results. Its new account growth in 2021 and resultant contribution to loan growth will likely drive 2022 results. The company expects loan growth for 2022 in high-single digits. Net interest margin for 2022 is expected to be relatively in line with the 2021 figure. Yet, total operating expenses are likely to rise in mid-single digits, which might put pressure on the bottom line. The average net charge-off rate for 2022 is expected within 2.2-2.6%, indicating an increase from 1.8% in 2021.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review.
VGM Scores
Currently, Discover has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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.
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.