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Discover Financial (DFS) Up 6.3% Since Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Discover Financial Services (DFS - Free Report) . Shares have added about 6.3% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is DFS 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 (DFS - Free Report) Beats on Q1 Earnings and Revenues

Discover Financial Services’ first-quarter 2018 adjusted earnings of $1.82 per share surpassed the Zacks Consensus Estimate by 2.8%. The bottom line also rose 27% year over year on higher revenues.

Operational Update

For the reported quarter, the company’s revenue net of interest expenses increased 10% year over year to $2.6 billion, driven by strong loan and revenue growth across segments. The top line also slightly beat the Zacks Consensus Estimate by 0.5%.

Consumer deposits grew 11% from the year-ago quarter to $41.3 billion.

Interest expenses of $469 million jumped 21% year over year.

Total other expenses increased 9.3% to $968 million due to higher employee compensation and benefits, marketing and business Development expenses as well as professional fees.

Segment Update
Direct Banking Segment

This segment’s pre-tax income declined 1.6% to $811 million.

Total loans increased 9% year over year to $82.7 billion.

Credit card loans rose 10% to $65.6 billion.

Personal loans increased 10%, private student loans increased 3% and climbed 11% excluding purchased student loans, all on a year-over-year basis.

Net interest income increased 11% to $2.1 billion from the prior year, driven by loan growth and a higher net interest margin. Net interest margin was 10.23%, up 16 basis points from the year-ago quarter.

Other income rose 5% from the comparable quarter last year, driven by higher discount and interchange revenues.

Provision for loan loss of $751 million increased 28% year over year due to higher net charge-offs and a higher reserve build.

Payment Services Segment

Payment Services pretax income was $45 million in the quarter, up 2.2% from the year-earlier quarter.

Payment Services transaction dollar volume was $56.1 billion, up 19% from the prior-year-quarter.

PULSE transaction dollar volume went up 20% year over year, driven by merchant and acquirer routing decisions.

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

Network Partners volume expanded 24%, backed by AribaPay.

Financial Position

Discover Financial had total assets worth $102 billion as of Mar 31, 2018, up 7.6% year over year.

Total liabilities as of Mar 31, 2018 were $91 billion, up 9% year over year.

Total equity was $10.9 billion on Mar 31, 2018, down 3.5% year over year.

Discover Financial’s return on equity for the first quarter was 25%.

Share Repurchase Update

During the first quarter, the company repurchased approximately 7.5 million shares of common stock for $584 million.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. There have been four revisions higher for the current quarter compared to four lower.

VGM Scores

At this time, DFS has an average Growth Score of C, however its Momentum is doing a lot better with an A. The stock was allocated a grade of B on the value side, putting it in the top 40% 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.

Based on our scores, the stock is primarily suitable for momentum investors while also being suitable for those looking for value and to a lesser degree growth.


DFS has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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