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Should Value Investors Pick Discover Financial Services (DFS) Stock?
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Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Discover Financial Services (DFS - Free Report) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
PE Ratio
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Discover Financial has a trailing twelve months PE ratio of 13.1 as you can see below:
This level compares pretty favorably with the market at large, as the PE ratio for the S&P 500 comes in at 21.4. If we focus on the long-term trend of the stock the current level puts Discover Financial’s current PE among its highs. This suggests that the stock is overvalued compared to its own historical levels.
Further, the stock’s PE also compares favorably with its sector's trailing twelve months PE ratio, which stands at 16.8. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Discover Financial has a forward PE ratio (price relative to this year’s earnings) of 12.6 – which is faintly lower than the current figure. So it is fair to say that a slightly more value-oriented path may be ahead for Discover Financial stock in the near term.
P/S Ratio
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, the company has a P/S ratio of about 2.5. This is lower than the S&P 500 average, which comes in at 3.4x right now. Also, as we can see in the chart below, this is below the highs for this stock in particular over the past few years.
Broad Value Outlook
In aggregate, Discover Financial currently has a Zacks Value Style Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Discover Financial a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the EV/EBITDA for Discover Financial is 9.2, a level that is lower than the industry average of 12.3. The EV/EBITDA multiple (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) is capital structure-neutral, as it takes into account the level of debt on a company’s balance sheet, not just its equity.
What About the Stock Overall?
Though Discover Financial might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of C and a Momentum score of C. This gives DFS a Zacks VGM score—or its overarching fundamental grade—of B. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been mostly trending upwards. The current year has seen five estimates go higher in the past sixty days compared to two lower, while the next year estimate has seen six upward revisions and one downward revisions in the same time period.
As a result, the current year consensus estimate has increased by 0.7% in the past two months, while the next year estimate has inched higher by 0.9%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Even though Discover Financial has a better estimates trend, the stock has just a Zacks Rank #3 (Hold). That is why we are looking for in-line performance from the company in the near term.
Bottom Line
The Finance – Consumer Loans industry is characterized by stiff competition that weighs on the individual companies’ financials. The adverse impact of currency fluctuation has also been hurting the industry. Also, the future success of this space is dependent on the companies’ ability to adapt to technological changes and evolving industry standards, any failure in which might cause major decline in revenues.
Currently the industry carries a sluggish industry rank (Bottom 23% out of more than 250 industries), which dims the sparkle on Discover Financial stock too. As you can see below, the industry has also widely underperformed the broader market over the past three years.
Thus, value investors might want to wait for broader factors to favorable before investing in it.
Zacks Editor-in-Chief Goes "All In" on This Stock
Full disclosure, Kevin Matras now has more of his own money in one particular stock than in any other. He believes in its short-term profit potential and also in its prospects to more than double by 2019. Today he reveals and explains his surprising move in a new Special Report.
Image: Bigstock
Should Value Investors Pick Discover Financial Services (DFS) Stock?
Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Discover Financial Services (DFS - Free Report) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
PE Ratio
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Discover Financial has a trailing twelve months PE ratio of 13.1 as you can see below:
This level compares pretty favorably with the market at large, as the PE ratio for the S&P 500 comes in at 21.4. If we focus on the long-term trend of the stock the current level puts Discover Financial’s current PE among its highs. This suggests that the stock is overvalued compared to its own historical levels.
Further, the stock’s PE also compares favorably with its sector's trailing twelve months PE ratio, which stands at 16.8. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Discover Financial has a forward PE ratio (price relative to this year’s earnings) of 12.6 – which is faintly lower than the current figure. So it is fair to say that a slightly more value-oriented path may be ahead for Discover Financial stock in the near term.
P/S Ratio
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, the company has a P/S ratio of about 2.5. This is lower than the S&P 500 average, which comes in at 3.4x right now. Also, as we can see in the chart below, this is below the highs for this stock in particular over the past few years.
Broad Value Outlook
In aggregate, Discover Financial currently has a Zacks Value Style Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Discover Financial a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the EV/EBITDA for Discover Financial is 9.2, a level that is lower than the industry average of 12.3. The EV/EBITDA multiple (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) is capital structure-neutral, as it takes into account the level of debt on a company’s balance sheet, not just its equity.
What About the Stock Overall?
Though Discover Financial might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of C and a Momentum score of C. This gives DFS a Zacks VGM score—or its overarching fundamental grade—of B. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been mostly trending upwards. The current year has seen five estimates go higher in the past sixty days compared to two lower, while the next year estimate has seen six upward revisions and one downward revisions in the same time period.
As a result, the current year consensus estimate has increased by 0.7% in the past two months, while the next year estimate has inched higher by 0.9%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Discover Financial Services Price and Consensus
Discover Financial Services Price and Consensus | Discover Financial Services Quote
Even though Discover Financial has a better estimates trend, the stock has just a Zacks Rank #3 (Hold). That is why we are looking for in-line performance from the company in the near term.
Bottom Line
The Finance – Consumer Loans industry is characterized by stiff competition that weighs on the individual companies’ financials. The adverse impact of currency fluctuation has also been hurting the industry. Also, the future success of this space is dependent on the companies’ ability to adapt to technological changes and evolving industry standards, any failure in which might cause major decline in revenues.
Currently the industry carries a sluggish industry rank (Bottom 23% out of more than 250 industries), which dims the sparkle on Discover Financial stock too. As you can see below, the industry has also widely underperformed the broader market over the past three years.
Thus, value investors might want to wait for broader factors to favorable before investing in it.
Zacks Editor-in-Chief Goes "All In" on This Stock
Full disclosure, Kevin Matras now has more of his own money in one particular stock than in any other. He believes in its short-term profit potential and also in its prospects to more than double by 2019. Today he reveals and explains his surprising move in a new Special Report.
Download it free >>