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Why Is Discover (DFS) Up 2.9% Since Last Earnings Report?

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It has been about a month since the last earnings report for Discover (DFS - Free Report) . Shares have added about 2.9% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.

Discover Financial Q3 Earnings Surpass, Improve Y/Y

Discover Financial’s third-quarter 2019 adjusted earnings of $2.36 beat the Zacks Consensus Estimate by 3.1%. Moreover, the bottom line improved 15.1% year over year on higher revenues and solid loan growth. Its Direct Banking and Payments Services segments also witnessed growth in the third quarter.

Operational Update

In the reported quarter, the company’s revenues — net of interest expenses — increased 6.5% year over year to $2.9 billion, driven by higher net interest income and loan fee income. Moreover, the top line surpassed the Zacks Consensus Estimate by 0.7%.

Total loans grew 6% year over year to $92.5 billion.

Interest expenses of $638 million increased 14.3% year over year.

Total other expenses rose 9.1% to $1.11 billion due to higher employee compensation, marketing and business development and professional fees.

Segmental Update

Direct Banking Segment


This segment’s pre-tax income inched up 2.2% to $943 million owing to more net interest income. However, the same was largely offset by a rise in provision for loan losses and higher operating expenses.

Total loans climbed 6% year over year to $92.5 billion. Credit card loans augmented 7% to $74 billion.

Personal loans ascended 1% while private student loans rose 4%. The same also shot up 9% excluding purchased student loans, all on a year-over-year basis.

Net interest income increased 8% year over year, driven by loan growth and net interest margin expansion. Net interest margin was 10.43%, up 15 basis points from the year-ago quarter.

Payment Services Segment

Payment Services pre-tax income was $51 million in the quarter under review, up 16% from the year-earlier period owing to higher revenues driven by transaction volume growth.

Payment Services transaction dollar volume was $62.6 billion, up 7% from the prior-year period.

PULSE transaction dollar volume expanded 5% year over year, driven by the impact of new issuers and acquiring relationships on the network and strong growth from existing issuers and acquirers.

Diners Club volume grew 0.2% from the year-earlier quarter.

Network Partners volume expanded 30%, backed by AribaPay.

Strong Financial Position

Discover Financial had total assets worth $110.8 billion as of Sep 30, 2019, up 4.7% year over year.

Total liabilities as of Sep 30, 2019 were $99 billion, up 4.5% year over year.
Total equity was $11.1 billion on Sep 30, 2019, up 6.4% year over year.

Discover Financial’s return on equity for the third quarter was 26%.

Share Repurchase Update

During the quarter under review, the company repurchased approximately 5.1 million shares of common stock for $419 million.

Shares of common stock outstanding dipped 1.4% from the previously reported quarter’s tally.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

Currently, Discover has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Discover has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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