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Here's Why You Should Stay Away From Discover Financial

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Discover Financial Services (DFS - Free Report) has been under pressure due loss of business owing to the COVID-19 outbreak.

Its sales volumes have been weighed on since April. Increased spending on groceries was offset by a 60% decline in expenses for petroleum. The company also saw soft sales volume in travel category and retail and the trend is likely to continue until the pandemic persists. 

Discover Financial posted first-quarter 2020 adjusted loss of 25 cents per share. The Zacks Consensus Estimate was of adjusted earnings per share of $1.36. Moreover, the bottom line came in against the year-ago quarter’s adjusted earnings of $2.15 per share.

The company even scrapped its 2020 outlook due to the current market volatility. Further, bearish consumer sentiments in the wake of shutdowns and a halt in business activities significantly hurt loan demand.

Though rise in lending to subprime borrowers led to improved revenues for consumer loan providers, it resulted in higher provision for credit losses, thereby denting bottom-line growth to some extent. In the first quarter, provision for credit losses surged 123.3% year over year, indicating dull economic outlook.

Discover Financial has been incurring considerable expenses over the past many years to compete with other credit card issuers, win and retain customers and also expand the frequency of card usage. For 2018 and 2019, total other expenses climbed 8% and 7% year over year, respectively.
In the first quarter, expenses rose 13.2% year over year due to higher compensation expense, escalated marketing cost and investments in technology. The planned marketing, technology and infrastructure investments plus steep legal, regulatory and compliance costs are also expected to flare up operating expenses going forward, which will limit bottom-line growth.

The company’s long-term growth rate stands at 5.10%, lower than the industry's average of 16.50%.

Its 2020 earnings estimate stands at $2 while the same for current-year revenues is pegged at $10.86 billion, both implying a respective downside of 77.9% and 5.2% from the year-ago reported figures.

Shares of this Zacks Rank #5 (Strong Sell) company have lost 47.4% in a year's time, wider than its industry's decline of 36.7%. The performance looks drab in comparison to other companies in the same space, such as Global Payments Inc. (GPN - Free Report) , Visa Inc. (V - Free Report) and American Express Company (AXP - Free Report) . Global Payments and Visa have gained 15.2% and 17.3%, respectively, while American Express has lost 25.3% in the same time frame. All these companies carry a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.



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