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Discover (DFS) Down 12.3% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Discover (DFS). Shares have lost about 12.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Discover due for a breakout? 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 Q4 Earnings Top Estimates, Rise Y/Y

Discover Financial’s fourth-quarter 2019 adjusted earnings of $2.25 beat the Zacks Consensus Estimate by 0.9%. Moreover, the bottom line improved 10.8% year over year on higher revenues and loan growth. The Payments Services segment witnessed significant growth in the fourth quarter.

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 discount and interchange revenues. However, the top line missed the Zacks Consensus Estimate by 0.1%.

Total loans grew 6% year over year to $95.9 billion.

Interest expenses of $615 million increased 1.7% year over year.

Total other expenses rose 6.7% to $1.18 billion due to higher employee compensation and benefits, information processing and communications, and professional fees.

Segmental Update

Direct Banking Segment


This segment’s pre-tax income inched up 1% to $883 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 $95.9 billion. Credit card loans augmented 6% to $77.2 billion.

Personal loans ascended 3% while private student loans rose 3%, 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 5% year over year, backed by loan growth. Net interest margin was 10.29%, down 6 basis points from the year-ago quarter.

Payment Services Segment

Payment Services pre-tax income was $41 million in the quarter under review, up 78.3% from the year-earlier period owing to higher revenues, aided by transaction volume growth from PULSE and Network Partners businesses.
Payment Services volume was up 9% from the prior-year period.

PULSE dollar volume expanded 6% year over year, fueled by the impact of new issuers and acquiring relationships on the network and strong growth from existing issuers and acquirers.

Diners Club volume grew 1.5% from the year-earlier quarter.

Network Partners volume expanded 52%, backed by AribaPay.

Strong Financial Position

Discover Financial had total assets worth $113.9 billion as of Dec 31, 2019, up 4.1% year over year.

Total liabilities as of Dec 31, 2019 were $102.1 billion, up 3.8% year over year.
Total equity was $11.8 billion on Dec 31, 2019, up 6.5% year over year.
Discover Financial’s return on equity for the fourth quarter was 24%.

Share Repurchase Update

During the quarter under review, the company repurchased approximately 4.9 million shares of common stock for $401 million.

Shares of common stock outstanding dipped 1.5% from the previously reported quarter’s tally.
 

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months.

VGM Scores

At this time, Discover has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top 20% 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.

Outlook

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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