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Why Is Discover (DFS) Up 17% 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 17% 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 drivers.

Discover Financial's Q1 Earnings Miss, Tumble Y/Y

Discover Financial incurred first-quarter 2020 adjusted loss of 25 cents per share. The Zacks Consensus Estimate was of adjusted earnings of $1.36. Moreover, the bottom line came in against the year-ago quarter’s adjusted earnings of $2.15 per share. This underperformance was due to the COVID-19 outbreak.

Operational Update

In the reported quarter, the company’s revenues — net of interest expenses — increased 5% year over year to $2.9 billion, driven by higher net interest income and total other income. Moreover, the top line beat the Zacks Consensus Estimate by 0.8%.

Total loans grew 5% year over year to $93 billion.

Interest expenses of $584 million decreased 7.6% year over year.

Total other expenses rose 13.2% to $1.15 billion due to higher employee compensation and benefits, marketing and business development, information processing and communications, and professional fees and other expenses.

Segmental Update

Direct Banking Segment


This segment’s pre-tax loss of $161 million came in against the year-ago quarter’s pre-tax income of $879 million. This was due to higher provision of credit losses and higher operating expenses.

Total loans climbed 5% year over year to $93 billion. Credit card loans augmented 4% to $73.8 billion.

Personal loans ascended 3% while private student loans rose 4%, both on a year-over-year basis. Private student loans excluding purchased student loans also shot up 9% year over year.

Net interest income increased 4% year over year, backed by loan growth.
Net interest margin was 10.21%, down 25 basis points from the year-ago quarter.

Payment Services Segment

Payment Services pre-tax income was $83 million in the quarter under review, up 62.7% from the year-earlier period owing to a one-time gain on the sale of an equity investment.

Payment Services volume was up 5% from the prior-year period.

PULSE dollar volume expanded 4% year over year, fueled by the impact of new issuers and acquiring relationships on the network as well as strong growth from existing issuers and acquirers.

Diners Club volume declined 6.5% from the year-earlier quarter.

Network Partners volume expanded 23%, backed by AribaPay.

Strong Financial Position

Discover Financial had total assets worth $112.6 billion as of Mar 31, 2020, up 1.7% year over year.

Total liabilities as of Mar 31, 2020 were $102.9 billion, up 3.6% year over year.

Total equity was $9.6 billion on Mar 31, 2020, down 14.2% year over year.

Share Repurchase Update

During the quarter under review, the company bought back 4.7 million shares of common stock for $343 million. It suspended the buyback program in March.

Shares of common stock outstanding dipped 1.2% from the previous quarter’s level.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -76.29% due to these changes.

VGM Scores

At this time, Discover has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, 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 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 indicates a downward shift. It's no surprise Discover has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.


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