A month has gone by since the last earnings report for Discover (DFS). Shares have added about 8% 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 catalysts.
Discover Financial Q4 Earnings Lag Estimates, Up Y/Y
Discover Financial's fourth-quarter 2018 adjusted earnings of $2.03 per share missed the Zacks Consensus Estimate by 3%. However, the bottom line improved 31% year over year on higher revenues and solid loan growth.
For the reported quarter, the company’s revenues, net of interest expenses, increased 7% year over year to $2.8 billion, driven by higher net interest incomes, loan fee income and the company’s other total income. However, the top line lagged the Zacks Consensus Estimate by 0.1%.
Total loans grew 7% year over year to $90.5 billion.
Interest expenses of $605 million surged 38.8% year over year.
Total other expenses rose 7.1% to $1.11 billion due to higher employee compensation and benefits plus other expenses.
Direct Banking Segment
This segment’s pre-tax income inched up 0.5% to $874 million owing to more net interest income. However, the same was largely offset by a rise in provision for loan losses and operating expenses.
Total loans climbed 7% year over year to $90.5 billion. Credit card loans augmented 9% to $72.9 billion.
Personal loans ascended 1%, private student loans rose 2%. The same also shot up 9% excluding purchased student loans, all on a year-over-year basis.
Net interest income increased 9% year over year, driven by loan growth and net interest margin expansion. Net interest margin was 10.35%, up 7 basis points from the year-ago quarter.
Payment Services Segment
Payment Services pre-tax income was $23 million in the quarter under review, down 20.7% from the year-earlier period, mainly due to growth-related expenditure.
Payment Services transaction dollar volume was $60.5 billion, up 12% from the prior-year period.
PULSE transaction dollar volume expanded 11% year over year, driven by the impact of new issuers on the network and strong growth from existing issuers.
Diners Club volume grew 5% from the year-earlier quarter, banking on consistent newer franchise relationships.
Network Partners volume expanded 43%, backed by AribaPay.
Strong Financial Position
Discover Financial had total assets worth $109.5 billion as of Dec 31, 2018, up 9.5% year over year.
Total liabilities as of Dec 31, 2018 were $98.4 billion, up 10.3% year over year.
Total equity was $11.1 billion on Dec 31, 2018, up 2.2% year over year.
Discover Financial’s return on equity for the fourth quarter was 25%.
Share Repurchase Update
During the quarter under review, the company repurchased approximately 6.7 million shares of common stock for $466 million.
Shares of common stock outstanding dipped 2.1% from the previously reported quarter’s tally.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
At this time, Discover has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Following the exact same course, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. 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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