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Can Rising Costs Hurt Discover Financial's (DFS) Q3 Earnings?
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Discover Financial Services (DFS - Free Report) is set to report its third-quarter 2023 results on Oct 18, after the closing bell.
What Do the Estimates Say?
The Zacks Consensus Estimate for third-quarter earnings per share of $3.17 suggests a 10.5% decrease from the prior-year figure of $3.54. The consensus mark improved by a penny over the past week. The consensus estimate for third-quarter revenues of $3.9 billion indicates a 13% increase from the year-ago reported figure.
Discover Financial beat the consensus estimate for earnings in one of the trailing four quarters and missed on the other three occasions, with the average surprise being negative 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.
Q2 Earnings Rewind
The digital banking and payment services company reported adjusted earnings of $3.54 per share for the previous quarter, missing the Zacks Consensus Estimate by 3.3%. 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 partly offset the negatives.
Now, let’s see how things have shaped up before the third-quarter earnings announcement.
Q3 Factors to Note
Discover Financial's top-line performance is anticipated to have been positively influenced by increased net interest income, which serves as the main contributor to its revenues. This metric is expected to have been propelled by robust asset growth and a high interest rate environment during the third quarter.
The Zacks Consensus Estimate for the net interest income of DFS indicates 14.9% growth from the prior-year quarter’s reported figure of $2.8 billion, while our estimate suggests an 11.4% year-over-year increase.
Robust sales, moderation in payment rates, and improved new account growth are anticipated to have driven an upswing in receivables growth in the to-be-reported quarter. Discover Financial's prudent approach to underwriting, pricing, and marketing of its non-card products is likely to have aided its performance during the third quarter.
Rising debit transaction volume and the growing expenditures in travel and entertainment are likely to have propelled PULSE and Diners Club volume, consequently contributing to a favorable performance of the Payment Services unit.
The top line of Discover Financial is also expected to have benefited from improving non-interest income in the third 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. We expect the metric to increase 11.5% year over year in the third quarter.
However, strong sales usually give rise to high reward costs, which are expected to have partially offset the company's non-interest income. Our estimate for third-quarter reward costs indicates almost 6% year-over-year growth.
The Zacks Consensus Estimate for net interest margin is pegged at 10.91% for the third quarter, implying a decrease from 11.05% a year ago. 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 high provisions for bad loans in the third 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 almost 15% year-over-year growth. We expect total operating expense for the third quarter to have jumped more than 13% 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 -0.65%. This is because the Most Accurate Estimate currently stands at $3.15 per share, lower than the Zacks Consensus Estimate of $3.17.
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 Credit Acceptance’s bottom line for the to-be-reported quarter is pegged at $7.03 per share, indicating 8.3% year-over-year growth. It has witnessed one upward estimate revision in the past 30 days against none in the opposite direction. The consensus estimate for CACC’s revenues is pegged at $486.8 million, suggesting a 5.8% increase from a year ago.
OneMain Holdings, Inc. (OMF - Free Report) has an Earnings ESP of +2.37% and a Zacks Rank of 3.
The Zacks Consensus Estimate for OneMain’s bottom line for the to-be-reported quarter is pegged at $1.50 per share. The consensus estimate for its revenues is pegged at $908.4 million, predicting a 1.5% increase from a year ago. OMF beat earnings estimates in two of the past four quarters and missed twice.
Enova International, Inc. (ENVA - Free Report) has an Earnings ESP of +2.26% and a Zacks Rank of 3.
The Zacks Consensus Estimate for Enova International’s bottom line for the to-be-reported quarter is pegged at $2 per share, suggesting a 14.9% year-over-year increase. The estimate remained stable over the past week. ENVA beat earnings estimates in all the past four quarters, with an average surprise of 7.6%.
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Can Rising Costs Hurt Discover Financial's (DFS) Q3 Earnings?
Discover Financial Services (DFS - Free Report) is set to report its third-quarter 2023 results on Oct 18, after the closing bell.
What Do the Estimates Say?
The Zacks Consensus Estimate for third-quarter earnings per share of $3.17 suggests a 10.5% decrease from the prior-year figure of $3.54. The consensus mark improved by a penny over the past week. The consensus estimate for third-quarter revenues of $3.9 billion indicates a 13% increase from the year-ago reported figure.
Discover Financial beat the consensus estimate for earnings in one of the trailing four quarters and missed on the other three occasions, with the average surprise being negative 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.
Q2 Earnings Rewind
The digital banking and payment services company reported adjusted earnings of $3.54 per share for the previous quarter, missing the Zacks Consensus Estimate by 3.3%. 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 partly offset the negatives.
Now, let’s see how things have shaped up before the third-quarter earnings announcement.
Q3 Factors to Note
Discover Financial's top-line performance is anticipated to have been positively influenced by increased net interest income, which serves as the main contributor to its revenues. This metric is expected to have been propelled by robust asset growth and a high interest rate environment during the third quarter.
The Zacks Consensus Estimate for the net interest income of DFS indicates 14.9% growth from the prior-year quarter’s reported figure of $2.8 billion, while our estimate suggests an 11.4% year-over-year increase.
Robust sales, moderation in payment rates, and improved new account growth are anticipated to have driven an upswing in receivables growth in the to-be-reported quarter. Discover Financial's prudent approach to underwriting, pricing, and marketing of its non-card products is likely to have aided its performance during the third quarter.
Rising debit transaction volume and the growing expenditures in travel and entertainment are likely to have propelled PULSE and Diners Club volume, consequently contributing to a favorable performance of the Payment Services unit.
The top line of Discover Financial is also expected to have benefited from improving non-interest income in the third 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. We expect the metric to increase 11.5% year over year in the third quarter.
However, strong sales usually give rise to high reward costs, which are expected to have partially offset the company's non-interest income. Our estimate for third-quarter reward costs indicates almost 6% year-over-year growth.
The Zacks Consensus Estimate for net interest margin is pegged at 10.91% for the third quarter, implying a decrease from 11.05% a year ago. 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 high provisions for bad loans in the third 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 almost 15% year-over-year growth. We expect total operating expense for the third quarter to have jumped more than 13% 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 -0.65%. This is because the Most Accurate Estimate currently stands at $3.15 per share, lower than the Zacks Consensus Estimate of $3.17.
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:
Credit Acceptance Corporation (CACC - Free Report) has an Earnings ESP of +18.15% 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 Credit Acceptance’s bottom line for the to-be-reported quarter is pegged at $7.03 per share, indicating 8.3% year-over-year growth. It has witnessed one upward estimate revision in the past 30 days against none in the opposite direction. The consensus estimate for CACC’s revenues is pegged at $486.8 million, suggesting a 5.8% increase from a year ago.
OneMain Holdings, Inc. (OMF - Free Report) has an Earnings ESP of +2.37% and a Zacks Rank of 3.
The Zacks Consensus Estimate for OneMain’s bottom line for the to-be-reported quarter is pegged at $1.50 per share. The consensus estimate for its revenues is pegged at $908.4 million, predicting a 1.5% increase from a year ago. OMF beat earnings estimates in two of the past four quarters and missed twice.
Enova International, Inc. (ENVA - Free Report) has an Earnings ESP of +2.26% and a Zacks Rank of 3.
The Zacks Consensus Estimate for Enova International’s bottom line for the to-be-reported quarter is pegged at $2 per share, suggesting a 14.9% year-over-year increase. The estimate remained stable over the past week. ENVA beat earnings estimates in all the past four quarters, with an average surprise of 7.6%.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.