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Why Is Discover (DFS) Down 13.3% Since Last Earnings Report?

It has been about a month since the last earnings report for Discover (DFS). Shares have lost about 13.3% 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 catalysts.

Discover Financial’s Q2 Earnings and Revenues Beat Estimates

Discover Financial’s second-quarter 2019 adjusted earnings of $2.32 per share beat the Zacks Consensus Estimate by 10%. Moreover, the bottom line improved 21.5% year over year on higher revenues.

Operational Update

For the reported quarter, the company’s revenues, net of interest expenses, increased 9.6% year over year to $2.8 billion, driven by higher net interest income, the company’s other total income. The top line also exceeded the Zacks Consensus Estimate by 2.1%.

Total loans grew 6% year over year to $90.2 billion.

Interest expenses of $645 million jumped 27.2% year over year.

Total other expenses rose 9.6% to nearly $1.1 billion due to higher employee compensation and benefits, information processing and communications, professional fees and other expenses.

Segment Update

Direct Banking Segment


This segment’s pre-tax income improved 12.4% to $941 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 6% year over year to $90.2 billion. Credit card loans augmented 7% to $72.4 billion.

While personal loans inched up 2%, private student loans rose 3%. The same also ascended 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 10.47%, up 26 basis points from the year-ago quarter.

Payment Services Segment

Payment Services pre-tax income was $46 million in the quarter under review, up 6% from the year-earlier period on the back of higher revenues.

Payment Services transaction dollar volume was $61.8 billion, up 8% from the prior-year period.

PULSE transaction dollar volume expanded 7% year over year, aided by a solid uptick from current issuers, the effect of new issuers on the network and more support for the company’s PINless products.

Diners Club volume was up 0.7% from the year-earlier quarter.

Network Partners volume expanded 29%, backed by AribaPay.

Strong Financial Position

Discover Financial had total assets worth $110.7 billion as of Jun 30, 2019, up 7.7% year over year.

Total liabilities as of Jun 30, 2019 were $99 billion, up 8% year over year.

Total equity was $11.5 billion on Dec 31, 2018, up 5.5% year over year.

Discover Financial’s return on equity for the second quarter was 26%.

Share Repurchase Update

During the quarter under consideration, the company repurchased approximately 6 million shares of common stock for $461 million.

Shares of common stock outstanding dipped 1.8% from the previously reported quarter’s tally.

In June, the company declared its capital plan for four quarter ending Jun 30, 2020, according to which the company will buy back shares up to $1.63 billion and there is also an a hike in its quarterly dividend from 40 cents to 44 cents per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

VGM Scores

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 quintile 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 upward for the stock, and the magnitude of these revisions has been net zero. 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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