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Can Interest Income Drive Discover Financial's (DFS) Q4 Earnings?
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Discover Financial Services (DFS - Free Report) is poised to surpass fourth-quarter 2023 earnings expectations. The results, to be announced on Jan 17, after the closing bell, are anticipated to reflect sustained growth in net interest income and Payment Services revenues, contributing to its performance.
What Do the Estimates Say?
The Zacks Consensus Estimate for fourth-quarter earnings per share of $2.50 suggests a 33.2% decrease from the prior-year figure of $3.74. The consensus mark has witnessed two upward estimate revisions over the past week against four in the opposite direction. The consensus estimate for fourth-quarter revenues of $4.1 billion indicates a 9.7% 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 5.6%. This is depicted in the graph below:
Discover Financial Services Price and EPS Surprise
Nevertheless, our proven model predicts a likely 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, which is precisely the case here.
Earnings ESP: Discover Financial has an Earnings ESP of +3.98%. This is because the Most Accurate Estimate is currently pegged at $2.60 per share, higher than the Zacks Consensus Estimate of $2.50. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Discover Financial currently has a Zacks Rank #3.
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.
Q3 Earnings Rewind
The digital banking and payment services company reported adjusted earnings of $2.59 per share for the previous quarter, missing the Zacks Consensus Estimate by 17.8%. 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 contributed to the upside.
Discover Financial's top-line performance is expected to have been positively influenced by increased net interest income, which serves as a pivotal contributor to its revenues. This metric is expected to have been propelled by robust asset growth and an advantageous backdrop of a high-interest rate environment during the fourth quarter. The Zacks Consensus Estimate for the net interest income of DFS indicates 9.8% growth from the prior-year quarter’s reported figure of $3.1 billion, while our estimate suggests a nearly 6% year-over-year increase.
Enhanced growth in new accounts, moderation in payment rates and robust sales are likely to have aided its receivables growth in the to-be-reported quarter. Its prudent approach to underwriting, pricing and marketing of the non-card products is expected to play a crucial role in fourth-quarter performance.
Increased debit transaction volume and rising expenditures in travel and entertainment are expected drivers for elevated PULSE and Diners Club volumes. This is likely to positively impact the overall performance of the Payment Services unit. Our model indicates revenues from Payment Services to have increased more than 23% year over year in the fourth quarter.
The top line of Discover Financial is also expected to have benefited from improving non-interest income in the fourth 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. The Zacks Consensus Estimate for the metric indicates an 8.2% year-over-year increase, while our model predicts an almost 9% increase in the fourth quarter.
The above-mentioned factors are expected to have positioned the company for an earnings beat in the fourth 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 fourth-quarter reward costs indicates almost 5% year-over-year growth.
The Zacks Consensus Estimate for net interest margin is pegged at 10.78% for the fourth quarter, implying a decrease from 11.27% a year ago. The profits of Discover Financial are likely to have suffered a setback due to escalating costs. We expect total expenses to have increased 3.5% in the quarter under review. Also, the bottom line is expected to have been impaired by high provisions for bad loans in the fourth 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 more than 6% year-over-year growth.
We expect higher expenses in Digital Banking to have led to a noticeable decline in the bottom line from a year ago. The Zacks Consensus Estimate for pre-tax income from the business indicates a more than 46.2% year-over-year decrease in the fourth quarter.
Other Stocks That Warrant a Look
Here are some other companies worth considering from the broader Finance space, as our model shows that these, too, have the right combination of elements to beat on earnings this time around:
The Zacks Consensus Estimate for Coinbase’s bottom line for the to-be-reported quarter suggests a 93.5% year-over-year improvement. The estimate improved 3 cents over the past week. COIN beat earnings estimates in three of the past four quarters and missed once, with an average surprise of 63%.
Chubb Limited (CB - Free Report) has an Earnings ESP of +2.40% and is a Zacks #2 Ranked player.
The Zacks Consensus Estimate for Chubb’s bottom line for the to-be-reported quarter indicates a 23.2% year-over-year increase. The estimate increased 6 cents over the past week. Furthermore, the consensus mark for CB’s revenues is pegged at $12.6 billion, suggesting 7.8% growth from a year ago.
Brookfield Asset Management Ltd. (BAM - Free Report) has an Earnings ESP of +1.75% and a Zacks Rank of 3.
The Zacks Consensus Estimate for Brookfield Asset Management’s bottom line for the to-be-reported quarter indicates 12.9% growth from the year-ago period. BAM beat earnings estimates twice in the past four quarters and missed on the other two occasions, with an average surprise of 0.2%.
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Can Interest Income Drive Discover Financial's (DFS) Q4 Earnings?
Discover Financial Services (DFS - Free Report) is poised to surpass fourth-quarter 2023 earnings expectations. The results, to be announced on Jan 17, after the closing bell, are anticipated to reflect sustained growth in net interest income and Payment Services revenues, contributing to its performance.
What Do the Estimates Say?
The Zacks Consensus Estimate for fourth-quarter earnings per share of $2.50 suggests a 33.2% decrease from the prior-year figure of $3.74. The consensus mark has witnessed two upward estimate revisions over the past week against four in the opposite direction. The consensus estimate for fourth-quarter revenues of $4.1 billion indicates a 9.7% 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 5.6%. This is depicted in the graph below:
Discover Financial Services Price and EPS Surprise
Discover Financial Services price-eps-surprise | Discover Financial Services Quote
What the Quantitative Model Suggests
Nevertheless, our proven model predicts a likely 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, which is precisely the case here.
Earnings ESP: Discover Financial has an Earnings ESP of +3.98%. This is because the Most Accurate Estimate is currently pegged at $2.60 per share, higher than the Zacks Consensus Estimate of $2.50. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Discover Financial currently has a Zacks Rank #3.
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.
Q3 Earnings Rewind
The digital banking and payment services company reported adjusted earnings of $2.59 per share for the previous quarter, missing the Zacks Consensus Estimate by 17.8%. 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 contributed to the upside.
Now, let’s see how things have shaped up prior to the fourth-quarter earnings announcement.
Factors Driving Q4 Performance
Discover Financial's top-line performance is expected to have been positively influenced by increased net interest income, which serves as a pivotal contributor to its revenues. This metric is expected to have been propelled by robust asset growth and an advantageous backdrop of a high-interest rate environment during the fourth quarter. The Zacks Consensus Estimate for the net interest income of DFS indicates 9.8% growth from the prior-year quarter’s reported figure of $3.1 billion, while our estimate suggests a nearly 6% year-over-year increase.
Enhanced growth in new accounts, moderation in payment rates and robust sales are likely to have aided its receivables growth in the to-be-reported quarter. Its prudent approach to underwriting, pricing and marketing of the non-card products is expected to play a crucial role in fourth-quarter performance.
Increased debit transaction volume and rising expenditures in travel and entertainment are expected drivers for elevated PULSE and Diners Club volumes. This is likely to positively impact the overall performance of the Payment Services unit. Our model indicates revenues from Payment Services to have increased more than 23% year over year in the fourth quarter.
The top line of Discover Financial is also expected to have benefited from improving non-interest income in the fourth 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. The Zacks Consensus Estimate for the metric indicates an 8.2% year-over-year increase, while our model predicts an almost 9% increase in the fourth quarter.
The above-mentioned factors are expected to have positioned the company for an earnings beat in the fourth 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 fourth-quarter reward costs indicates almost 5% year-over-year growth.
The Zacks Consensus Estimate for net interest margin is pegged at 10.78% for the fourth quarter, implying a decrease from 11.27% a year ago. The profits of Discover Financial are likely to have suffered a setback due to escalating costs. We expect total expenses to have increased 3.5% in the quarter under review. Also, the bottom line is expected to have been impaired by high provisions for bad loans in the fourth 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 more than 6% year-over-year growth.
We expect higher expenses in Digital Banking to have led to a noticeable decline in the bottom line from a year ago. The Zacks Consensus Estimate for pre-tax income from the business indicates a more than 46.2% year-over-year decrease in the fourth quarter.
Other Stocks That Warrant a Look
Here are some other companies worth considering from the broader Finance space, as our model shows that these, too, have the right combination of elements to beat on earnings this time around:
Coinbase Global, Inc. (COIN - Free Report) has an Earnings ESP of +87.69% and a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Coinbase’s bottom line for the to-be-reported quarter suggests a 93.5% year-over-year improvement. The estimate improved 3 cents over the past week. COIN beat earnings estimates in three of the past four quarters and missed once, with an average surprise of 63%.
Chubb Limited (CB - Free Report) has an Earnings ESP of +2.40% and is a Zacks #2 Ranked player.
The Zacks Consensus Estimate for Chubb’s bottom line for the to-be-reported quarter indicates a 23.2% year-over-year increase. The estimate increased 6 cents over the past week. Furthermore, the consensus mark for CB’s revenues is pegged at $12.6 billion, suggesting 7.8% growth from a year ago.
Brookfield Asset Management Ltd. (BAM - Free Report) has an Earnings ESP of +1.75% and a Zacks Rank of 3.
The Zacks Consensus Estimate for Brookfield Asset Management’s bottom line for the to-be-reported quarter indicates 12.9% growth from the year-ago period. BAM beat earnings estimates twice in the past four quarters and missed on the other two occasions, with an average surprise of 0.2%.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.