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Discover Financial (DFS) Down 3.2% Since Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Discover Financial Services (DFS - Free Report) . Shares have lost about 3.2% in that time frame, outperforming the market.

Will the recent negative trend continue leading up to its next earnings release, or is DFS due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Discover Financial Beats Q4 Earnings and Revenues

Discover Financial’s fourth-quarter 2017 adjusted earnings of $1.55 per share surpassed the Zacks Consensus Estimate by 1.3%. The bottom line also rose 10.7% year over year on higher revenues.

Including non-recurring charges and pre-tax expenses, net income per share came at 99 cents in the fourth quarter, down 29% year over year.

For 2017, the company reported net income of $5.42 per share, down 6% from the prior-year quarter.

Operational Update

For the reported quarter, the company’s revenue net of interest expenses increased 11% year over year to $2.6 billion, driven by strong loan and revenue growth across segments. The top line also surpassed the Zacks Consensus Estimate by 41%.

For 2017, revenue net of interest expenses increased 9% year over year to $9.9 billion, driven by strong loan and revenue growth across segments throughout the year.

Consumer deposits grew 9% from the year-ago quarter to $84.2 billion.

Interest expenses of $436 million jumped 19% year over year.

Total other expenses increased 15% to $1 billion due to higher employee compensation and benefits, marketing and business Development expenses and professional fees.

Segment Update
 
Direct Banking Segment

This segment’s pre-tax income rose 0.2% to $870 million. This was because higher revenues were partially offset by increased provision for loan losses and operating expenses.

Total loans increased 9% year over year to $84.2 billion.

Credit card loans rose 9% to $67.3 billion.

Personal loans increased 14%, private student loans increased 2% and jumped 11% excluding purchased student loans, all on a year-over-year basis.

Net interest income increased 12% to $2.1 billion from the prior year, driven by loan growth and a higher net interest margin. Net interest margin was 10.28%, up 21 basis points from the prior-year quarter.

Total other income rose 6% to $494 million from the prior-year quarter, driven by higher discount and interchange revenues.

Provision for loan losses of $678 million increased 17% year over year due to higher net charge-offs, partially offset by a smaller reserve build.

Payment Services Segment

Payment Services pretax income was $29 million in the quarter, up 93% from $15 million in the year-ago quarter. The rise was primarily driven by higher transaction processing revenues and interchange revenues as well as lower operating expenses.

Payment Services transaction dollar volume was $54 billion, up 17% from the prior-year-quarter.

PULSE transaction dollar volume went up 19% year over year.

Diners Club International volume rose 14% from the last-year quarter, driven by continued strength of newer franchise relationships.

Network Partners volume increased 1.4%.

Financial Position

Discover Financial had total assets worth $100.1 billion as of Dec 31, 2017, up 8.4% year over year.

Total liabilities as of Dec 31, 2017 were $89.2 billion, up 10% year over year.

Total equity was $10.9 billion on Dec 31, 2017, down 3.8% year over year.

Discover Financial’s return on equity for the fourth quarter was 14%.

Share Repurchase Update

During the fourth quarter, the company repurchased approximately 8.1 million shares of common stock for $555 million.

Shares of common stock outstanding declined 2.2% from the prior quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been five revisions higher for the current quarter compared to one lower.

VGM Scores

At this time, DFS has a subpar Growth Score of D, however its Momentum is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for value and momentum investors.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise that DFS has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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