It has been about a month since the last earnings report for Discover (DFS Quick QuoteDFS - Free Report) . Shares have added about 15.5% 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 catalysts.

Discover Financial's Q3 Earnings Beat on Interest Income Spike

Discover Financial reported strong third-quarter results supported by interest income growth, thanks to a high-interest rate environment, lower provision for credit losses, growing loans, PULSE volumes and margin expansion. The positives were partially offset by higher expenses.

It reported third-quarter 2024 adjusted earnings per share of $3.69, which comfortably beat the Zacks Consensus Estimate of $3.28. Also, the bottom line jumped 42% year over year.

Discover Financial's revenues, net of interest expenses, climbed 10% year over year to $4.45 billion. The top line also beat the consensus mark by 2.2%.

The company is collaborating with the Securities and Exchange Commission to address and resolve an issue related to the card misclassification matter. The resolution is not expected to affect its cumulative historical earnings.

Q3 Operational Update

Interest income of $5.11 billion jumped 11% year over year and beat our model estimate of $4.99 billion. Interest expense increased 13% year over year to $1.46 billion and was above our model estimate of $1.42 billion. Non-interest income jumped 11% year over year to $798 million but missed the Zacks Consensus Estimate by 3.3%.

Total operating expenses of $1.69 billion escalated 16% year over year due to increased employee compensation and benefits expenses, professional fees, information processing & communications costs and other expenses. The figure came higher than our estimate of $1.59 billion. Moreover, operating efficiency (total operating expenses divided by revenues, net of interest expenses) deteriorated 200 basis points (bps) year over year to 38% in the third quarter.

Discover Financial’s net income of $965 million surged 41% year over year.

Q3 Segmental Performance

Digital Banking

The segment reported a pretax income of $1.2 billion, which rose 50% year over year in the third quarter. The increase was due to lower provision for credit losses and growing revenues, net of interest expenses, partly offset by elevated operating expenses. The metric beat the consensus estimate by 16.4%. Provision for credit losses declined 13% year over year to $1.47 billion.

Total loans rose 4% year over year to $127 billion. Personal loans also grew 9% year over year. Credit card loans advanced 3% year over year while private student loans declined 19%.

Net interest income of $3.66 billion climbed 10% year over year, thanks to increased average receivables and net interest margin. The figure surpassed our estimate of $3.57 billion. The net interest margin improved 43 bps year over year to 11.38%.

Payment Services

The segment's pretax income was $84 million compared with the prior-year quarter’s income of $85 million. The metric missed the Zacks Consensus Estimate of $90.5 million.

The Payment Services volume of $100.47 billion advanced 9% year over year. The PULSE dollar volume rose 14% year over year on improved debit transaction volume. Meanwhile, the Diners Club volume increased 7% year over year, attributable to growth across most regions. The Network Partners’ volume decreased 24% year over year.

Financial Position (as of Sept. 30, 2024)

Discover Financial exited the third quarter with total assets of $151.59 billion, marginally higher than $151.52 billion at 2023-end. The liquidity portfolio (comprising cash and cash equivalents and other investments, excluding cash-in-process) amounted to $24.80 billion, higher than $23.25 billion at 2023-end.

Borrowings decreased from $21.33 billion at 2023-end to $18.18 billion. Total liabilities of $134.33 billion at the third-quarter end were lower than $136.69 billion at 2023-end. Total equity rose from $14.83 billion at 2023-end to $17.26 billion.

Capital Deployment Update

Management has currently paused share repurchases through merger closing with Capital One Financial Corporation. Discover Financial entered into a definitive agreement in February 2024 to merge with Capital One for $35.3 billion and the integration planning efforts are on track. The company declared a quarterly cash dividend of 70 cents per share and expects the dividend to remain at this level.

2024 Guidance (including private student loan divestment)

Management expects loan growth to be down low to mid-single digits. The net interest margin is forecasted to be in the range of 11.2-11.4%.

Operating expenses are still estimated to rise mid-single digits from $6 billion in 2023, excluding merger and card misclassification-related costs. The average net charge-off rate is estimated to be in the range of 4.9-5%. The estimate is higher than the 2023 figure of 3.42%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Discover has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. 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.