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Will Rising Costs Hurt Discover Financial's (DFS) Q2 Earnings?
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Discover Financial Services (DFS - Free Report) is set to report its second-quarter 2023 results on Jul 19, after the closing bell.
What Do the Estimates Say?
The Zacks Consensus Estimate for second-quarter earnings per share of $3.69 suggests a 6.8% decrease from the prior-year figure of $3.96. The consensus mark remained stable over the past week. The consensus estimate for second-quarter revenues of $3.9 billion indicates a 20.1% increase from the year-ago reported figure.
Discover Financial beat the consensus estimate for earnings in two of the trailing four quarters and missed on the other two occasions, with the average surprise being 0.2%. This is depicted in the graph below:
Discover Financial Services Price and EPS Surprise
Before we get into what to expect for the to-be-reported quarter in detail, it’s worth taking a look at DFS’ previous-quarter performance first.
Q1 Earnings Rewind
The digital banking and payment services company reported adjusted earnings of $3.58 per share for the previous quarter, missing the Zacks Consensus Estimate by 6.8%. The quarterly results received a blow from escalating operating costs and feeble contributions from the Digital Banking segment. Nevertheless, higher receivables growth, record deposit inflows and the solid performance of its Payment Services segment partially offset the negatives.
The top line of Discover Financial is expected to have benefited from higher net interest income, the primary contributor to its revenues. This metric is likely to have been driven by strong asset growth and net interest margin expansion in the second quarter.
The Zacks Consensus Estimate for the net interest income of DFS is pegged at $3,197.4 million, indicating 22.5% growth from the prior-year quarter’s reported figure, while our estimate suggests an 18.4% year-over-year increase. Meanwhile, the net interest margin is likely to have been favored by a high interest rate environment. The Zacks Consensus Estimate for net interest margin is pegged at 11.23% for the second quarter, implying an increase from 10.94% a year ago.
Strong sales, moderation in payment rates and improved new account growth are expected to have provided an impetus to receivable growth in the to-be-reported quarter. DFS’ disciplined underwriting, pricing and marketing of its non-card products are likely to have aided its performance in the second quarter.
The top line of Discover Financial is also expected to have benefited from improving non-interest income in the second quarter. Improved loan fee income, and higher net discount and interchange revenues, aided by a favorable sales mix, are likely to have contributed to the non-interest income growth of DFS.
However, strong sales usually give rise to high reward costs, which is expected to have partially offset the company's non-interest income. Our estimate for second-quarter reward costs indicates almost 6% year-over-year growth.
The Zacks Consensus Estimate for the non-interest income of DFS is pegged at $674.1 million, indicating almost 10% growth from the prior-year quarter’s reported figure. Our estimate for non-interest income suggests around 15% rise from the prior-year quarter’s reported number.
Increased debit transaction volume and growing travel and entertainment spending are expected to have driven PULSE and Diners Club volume, which is likely to have aided the performance of the Payment Services unit.
However, the profits of Discover Financial are likely to have suffered a setback due to escalating costs. Also, the bottom line is expected to have been impaired by rising provisions for bad loans in the second quarter.
Marketing costs and professional fees are likely to have witnessed increases as DFS has been investing in technology, and card and consumer banking products. Our estimate for employee compensation and benefits suggests 22.5% year-over-year growth. We expect total operating expenses for the second quarter to have jumped almost 15% year over year, leading to a noticeable decline in the bottom line, making an earnings beat uncertain.
Earnings Whispers
Our proven model does not conclusively predict an earnings beat for Discover Financial this time around. 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. That is not the case here, as you will see below.
Earnings ESP: The company has an Earnings ESP of -1.46%. This is because the Most Accurate Estimate currently stands at $3.64 per share, lower than the Zacks Consensus Estimate of $3.69.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Discover Financial currently carries a Zacks Rank #3.
Stocks to Consider
While an earnings beat looks uncertain for Discover Financial, here are some companies from the broader finance space that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:
The Zacks Consensus Estimate for Corebridge’s bottom line for the to-be-reported quarter is pegged at 97 cents per share, which witnessed four upward estimate revisions in the past 30 days against none in the opposite direction. The consensus estimate for CRBG’s revenues is pegged at $4.5 billion.
Aon plc (AON - Free Report) has an Earnings ESP of +2.56% and a Zacks Rank of 3.
The Zacks Consensus Estimate for AON’s bottom line for the to-be-reported quarter is pegged at $2.82 per share, indicating 7.2% year-over-year growth. The estimate witnessed two upward estimate revisions in the past week against none in the opposite direction. AON beat earnings estimates in three of the past four quarters and missed once, with an average surprise of 1.6%.
CME Group Inc. (CME - Free Report) has an Earnings ESP of +1.51% and a Zacks Rank of 2.
The Zacks Consensus Estimate for CME Group’s bottom line for the to-be-reported quarter is pegged at $2.15 per share, suggesting a 9.1% year-over-year increase. The estimate witnessed seven upward estimate revisions in the past month against none in the opposite direction. CME beat earnings estimates in all the past four quarters, with an average surprise of 2.2%.
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Will Rising Costs Hurt Discover Financial's (DFS) Q2 Earnings?
Discover Financial Services (DFS - Free Report) is set to report its second-quarter 2023 results on Jul 19, after the closing bell.
What Do the Estimates Say?
The Zacks Consensus Estimate for second-quarter earnings per share of $3.69 suggests a 6.8% decrease from the prior-year figure of $3.96. The consensus mark remained stable over the past week. The consensus estimate for second-quarter revenues of $3.9 billion indicates a 20.1% increase from the year-ago reported figure.
Discover Financial beat the consensus estimate for earnings in two of the trailing four quarters and missed on the other two occasions, with the average surprise being 0.2%. This is depicted in the graph below:
Discover Financial Services Price and EPS Surprise
Discover Financial Services price-eps-surprise | Discover Financial Services Quote
Before we get into what to expect for the to-be-reported quarter in detail, it’s worth taking a look at DFS’ previous-quarter performance first.
Q1 Earnings Rewind
The digital banking and payment services company reported adjusted earnings of $3.58 per share for the previous quarter, missing the Zacks Consensus Estimate by 6.8%. The quarterly results received a blow from escalating operating costs and feeble contributions from the Digital Banking segment. Nevertheless, higher receivables growth, record deposit inflows and the solid performance of its Payment Services segment partially offset the negatives.
Now let’s see how things have shaped up before the second-quarter earnings announcement.
Q2 Factors to Note
The top line of Discover Financial is expected to have benefited from higher net interest income, the primary contributor to its revenues. This metric is likely to have been driven by strong asset growth and net interest margin expansion in the second quarter.
The Zacks Consensus Estimate for the net interest income of DFS is pegged at $3,197.4 million, indicating 22.5% growth from the prior-year quarter’s reported figure, while our estimate suggests an 18.4% year-over-year increase. Meanwhile, the net interest margin is likely to have been favored by a high interest rate environment. The Zacks Consensus Estimate for net interest margin is pegged at 11.23% for the second quarter, implying an increase from 10.94% a year ago.
Strong sales, moderation in payment rates and improved new account growth are expected to have provided an impetus to receivable growth in the to-be-reported quarter. DFS’ disciplined underwriting, pricing and marketing of its non-card products are likely to have aided its performance in the second quarter.
The top line of Discover Financial is also expected to have benefited from improving non-interest income in the second quarter. Improved loan fee income, and higher net discount and interchange revenues, aided by a favorable sales mix, are likely to have contributed to the non-interest income growth of DFS.
However, strong sales usually give rise to high reward costs, which is expected to have partially offset the company's non-interest income. Our estimate for second-quarter reward costs indicates almost 6% year-over-year growth.
The Zacks Consensus Estimate for the non-interest income of DFS is pegged at $674.1 million, indicating almost 10% growth from the prior-year quarter’s reported figure. Our estimate for non-interest income suggests around 15% rise from the prior-year quarter’s reported number.
Increased debit transaction volume and growing travel and entertainment spending are expected to have driven PULSE and Diners Club volume, which is likely to have aided the performance of the Payment Services unit.
However, the profits of Discover Financial are likely to have suffered a setback due to escalating costs. Also, the bottom line is expected to have been impaired by rising provisions for bad loans in the second quarter.
Marketing costs and professional fees are likely to have witnessed increases as DFS has been investing in technology, and card and consumer banking products. Our estimate for employee compensation and benefits suggests 22.5% year-over-year growth. We expect total operating expenses for the second quarter to have jumped almost 15% year over year, leading to a noticeable decline in the bottom line, making an earnings beat uncertain.
Earnings Whispers
Our proven model does not conclusively predict an earnings beat for Discover Financial this time around. 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. That is not the case here, as you will see below.
Earnings ESP: The company has an Earnings ESP of -1.46%. This is because the Most Accurate Estimate currently stands at $3.64 per share, lower than the Zacks Consensus Estimate of $3.69.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Discover Financial currently carries a Zacks Rank #3.
Stocks to Consider
While an earnings beat looks uncertain for Discover Financial, here are some companies from the broader finance space that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:
Corebridge Financial, Inc. (CRBG - Free Report) has an Earnings ESP of +1.63% and is a Zacks #1 Ranked player. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Corebridge’s bottom line for the to-be-reported quarter is pegged at 97 cents per share, which witnessed four upward estimate revisions in the past 30 days against none in the opposite direction. The consensus estimate for CRBG’s revenues is pegged at $4.5 billion.
Aon plc (AON - Free Report) has an Earnings ESP of +2.56% and a Zacks Rank of 3.
The Zacks Consensus Estimate for AON’s bottom line for the to-be-reported quarter is pegged at $2.82 per share, indicating 7.2% year-over-year growth. The estimate witnessed two upward estimate revisions in the past week against none in the opposite direction. AON beat earnings estimates in three of the past four quarters and missed once, with an average surprise of 1.6%.
CME Group Inc. (CME - Free Report) has an Earnings ESP of +1.51% and a Zacks Rank of 2.
The Zacks Consensus Estimate for CME Group’s bottom line for the to-be-reported quarter is pegged at $2.15 per share, suggesting a 9.1% year-over-year increase. The estimate witnessed seven upward estimate revisions in the past month against none in the opposite direction. CME beat earnings estimates in all the past four quarters, with an average surprise of 2.2%.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.