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Why Shares of Discover Financial Climbed 4.7% on Friday

Lou Whiteman, The Motley Fool

What happened

Shares of Discover Financial Services (NYSE: DFS) climbed 4.72% on Friday after the credit card company reported earnings that came in ahead of expectations and provided fresh evidence of growth in its most important business.

So what

On Thursday night after markets closed, Discover reported first-quarter earnings of $2.15 per share, $0.10 higher than consensus estimates and 18% above the same quarter last year, on revenue of $2.76 billion. These results matched what analysts were expecting. The company ended the quarter with a total loan portfolio of $88.7 billion, up 7% year over year.

A customer prepares to pay for an online purchase with a credit card.

Image source: Getty images.

The company improved earnings despite spending $57 million more than the prior-year quarter, with most of that extra spending earmarked for higher employee compensation and investment in infrastructure and analytics capabilities.

In a statement accompanying the release, company CEO Roger Hochschild said that the quarter "showed the power of the Discover business model. "Our solid execution on growth initiatives, effective credit risk management and operating efficiency drove strong profitability," Hochschild said. "The Discover brand and our reputation for outstanding service continue to resonate with our customers and drive competitive differentiation."

Discover spent about $487 million to repurchase about 7.2 million shares of its common stock in the quarter.

Now what

Discover, the smallest of the four major U.S. credit card companies, grew its credit card loans by 8% year over year. That's the second-straight quarter of 8% growth in the segment and a positive sign for investors, since credit cards still make up about 80% of Discover's total loan portfolio.

Shares of Discover fell 23% in 2018 on fears about slowing growth and broader concerns about the state of the economy late in the year. The shares have bounced back nicely along with economic sentiment and are up 37% so far in 2019 after Friday's gains.

There are some issues to watch. Discover's provision for loan losses increased 7%, to $809 million in the quarter, due to higher net charge-offs. CFO Mark Graf said on a call with investors that "we feel pretty good" about delinquency trends, but as always with consumer lenders, it's an important metric to watch.

Overall, Discover gave investors every reason to believe that it can show steady growth as long as the economy cooperates and has the wherewithal to survive a downturn if it comes.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.