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Why Discover Financial (DFS) is Set to Beat on Q2 Earnings

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Discover Financial Services (DFS - Free Report) is set to continue its earnings beat streak in second-quarter 2022, results of which are expected to be released on Jul 20, after the closing bell.

In the last reported quarter, the digital banking and payment services company’s adjusted earnings per share of $4.22 beat the Zacks Consensus Estimate by 17.9%, primarily due to higher net interest income, improved net discount and interchange revenues and growth in loan fee income.

Strong credit performance and sound contributions from the Digital Banking and Payment Services segments contributed to the upside. However, the benefits were partly offset by elevated operating costs and a net loss on equity investments, amounting to $162 million.

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

Trend in Estimate Revision

The Zacks Consensus Estimate for second-quarter earnings per share of $3.77 has witnessed three upward revisions and one downward movement in the past 30 days. The estimate is indicative of a 32.1% decrease from the year-ago reported figure. Similarly, the Zacks Consensus Estimate for second-quarter revenues is pegged at $3.2 billion, suggesting a decline of 12.1% from the year-ago reported figure.

Discover Financial beat earnings estimates in each of the trailing four quarters, delivering an average of 18.3%. 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 +0.53%. The Most Accurate Estimate is pegged at $3.79 per share, higher than the Zacks Consensus Estimate of $3.77. 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 second-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 second quarter, which, in turn, must have led to higher loan fee income. The Zacks Consensus Estimate for loan fee income is pegged at $126 million, indicating a rise from the prior-year reported number of $105 million.

Loan growth will be accompanied by a 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 $2,522 million, signaling a jump from the prior-year quarter’s $2,299 million. 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 consensus mark for loss before taxes across the Payment Services segment is pegged at $52 million, signaling a massive deterioration from pretax earnings of $692 million a year ago. This might have led to a year-over-year decline in the bottom line for the second quarter.

The Zacks Consensus Estimate for transaction processing revenues indicates an 8.6% year-over-year rise. The same for protection products signals a 3.8% increase from second-quarter 2021. The Digital Banking segment may have gained on the back of higher net interest income and protection products revenues, partially offsetting the negatives of the Payment Services segment. This might have positioned the company for an earnings beat.

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 this time around:

CVB Financial Corp. (CVBF - Free Report) has an Earnings ESP of +5.82% and a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for CVB Financial’s bottom line for the to-be-reported quarter is pegged at 38 cents per share. CVBF witnessed one upward estimate revision in the past 30 days against none in the opposite direction.

American Express Company (AXP - Free Report) has an Earnings ESP of +1.92% and is a Zacks #3 Ranked player.

The Zacks Consensus Estimate for American Express’ top line for the to-be-reported quarter is pegged at $12.4 billion, implying a 21.2% improvement from the year-ago figure. AXP witnessed two upward estimate revisions in the past 30 days compared with one in the opposite direction.

CME Group Inc. (CME - Free Report) has an Earnings ESP of +0.90% and is a Zacks #3 Ranked player.

The Zacks Consensus Estimate for CME Group’s bottom line for the to-be-reported quarter indicates a 15.2% jump from a year ago. The consensus mark for CME’s top line indicates a 3.6% year-over-year increase.

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

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