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Why Is Discover (DFS) Down 0.8% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Discover (DFS). Shares have lost about 0.8% in that time frame, outperforming 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 Q1 Earnings, Revenues Top Estimates

Discover Financial Services’ first-quarter 2019 adjusted earnings of $2.15 per share, beat the Zacks Consensus Estimate by 7.5%.Moreover, the bottom line improved 18.1% year over year on higher revenues and increased loans.

Operational Update

Revenues, net of interest expenses, increased 7.3% year over year to $2.7 billion in the quarter, driven by stronger net interest incomes, loan fee income and transaction processing revenues.The top-line also beat the Zacks Consensus Estimate by 0.6%.

Total loans grew 7% year over year to $88.7 billion.

Interest expenses of $632 million surged 34.8% year over year.

Total other expenses rose 5.7% to $1.02 billion due to higher employee compensation and benefits plus professional fees, marketing and business development as well as premises and equipment.

Segment Update

Direct Banking Segment

This segment’s pre-tax income rose 8.4% to $879 million owing to higher 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 $88.7 billion. Credit card loans augmented 8% to $70.8 billion.

Personal loans increased 2% year over year.Private student loans rose 2% and were up 9% excluding purchased student loans, all on a year-over-year basis.

Net interest income increased 10% year over year, driven by loan growth and net interest margin expansion. Net interest margin was 10.46%, up 23 basis points from the year-ago quarter.

Payment Services Segment

Payment Services pre-tax income was $51 million, up 13.3% from the year-earlier period, mainly due to transaction volume growth.

Payment Services transaction dollar volume was $61 billion, up 9% from the prior-year period.

PULSE transaction dollar volume expanded 9% year over year, boosted by the impact of new issuers on the network and strong growth, courtesy of the existing issuers.

Network Partners volume expanded 24% on the back of AribaPay.

Strong Financial Position

Discover Financial had total assets worth $110.7 billion as of Mar 31, 2019, up 8.6% year over year.

Total liabilities as of Mar 31, 2019were $99.5 billion, up 9.2% year over year.

Total equity was $11.2 billion on Mar 31, 2019, up 3.6% year over year.

Share Repurchase Update

During the quarter under review, the company repurchased approximately 7.2 million shares of common stock for $487 million.

Shares of common stock outstanding dipped 1.8% year over year.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Discover has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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