Yahoo Finance Discover (DFS) Down 4.3% Since Last Earnings Report: Can It Rebound?
A month has gone by since the last earnings report for Discover (DFS). Shares have lost about 4.3% 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 its most recent earnings report in order to get a better handle on the important catalysts.
Discover Financial Misses on Q1 Earnings, Ups Dividend
Discover Financial reported first-quarter 2023 adjusted earnings of $3.58 per share, which missed the Zacks Consensus Estimate of $3.84 by 6.8%. The bottom line dropped 15% year over year.
Revenues — net of interest expenses — of DFS climbed 29% year over year to $3,753 million. The top line beat the consensus mark by 2.6%.
The quarterly results received a blow from escalating operating costs and feeble contributions from the Digital Banking segment. Nevertheless, higher receivables' growth, record deposit inflows and the solid performance of its Payment Services segment contributed to the upside.
Operational Update
Operating efficiency (total operating expenses divided by revenues, net of interest expenses) deteriorated 210 basis points (bps) year over year to 36.8% in the first quarter.
Total operating expenses of $1,383 million escalated 22% year over year due to increased employee compensation and benefits expenses, marketing and business development costs, professional fees, and information processing & communications expenses. The figure also surpassed our estimate of $1,348.7 million.
Interest expenses increased nearly four-fold year over year to $945 million in the quarter under review.
Discover Financial’s net income of $976 million tumbled 21% year over year.
Segmental Performance
Digital Banking
The segment reported a pretax income of $1,221 million, which fell 29% year over year in the first quarter. The decline was due to an increased provision for credit losses and elevated operating expenses, partly offset by growing revenues, net of interest expenses.
Provision for credit losses increased more than seven-fold year over year to $1,102 million.
Total loans rose 21% year over year to $112.7 billion in the quarter under review. Personal loans also grew 21% year over year. Credit card loans advanced 22% year over year, whereas private student loans improved 2% year over year.
Net interest income of $3,132 million climbed 26% year over year in the first quarter, thanks to increased average receivables and a higher net interest margin. The figure surpassed the Zacks Consensus Estimate of $2,803 million. The net interest margin improved 49 bps year over year to 11.34%.
Payment Services
The segment's pretax income was $47 million, comparing favorably against the prior-year quarter’s loss of $101 million. The metric beat our pretax income estimate of $44.5 million. The significant improvement came on the back of higher net losses on equity investments reported in the prior-year quarter. Expanding PULSE and Diners Club volumes also contributed to the upside.
The Payment Services volume of $85.1 billion advanced 10% year over year in the first quarter. The PULSE dollar volume rose 9% year over year on improved debit transaction volume. Meanwhile, the Diners Club volume climbed 28% year over year, attributable to higher global travel and entertainment, and corporate spending. However, the Network Partners volume dipped 1% year over year in the quarter under review due to reduced transaction volume.
Financial Position (as of Mar 31, 2023)
Discover Financial exited the first quarter with total assets of $133.1 billion, which climbed 24% year over year. The liquidity portfolio (comprising cash and cash equivalents and other investments, excluding cash-in-process) amounted to $21,450 million, which rose 44% year over year.
Borrowings increased 6% year over year to $18,163 million. Total liabilities of $118.7 billion advanced 26% year over year at the first-quarter end. Total equity rose 7% year over year to $14,315 million.
Share Repurchase Update
In the reported quarter, Discover Financial bought back 11.3 million common shares worth $1.2 billion. Shares of common stock outstanding decreased 4% sequentially.
Concurrently, management authorized a new share repurchase program of $2.7 billion, which will substitute the previous program and run till the end of June 2024.
Dividend Hike Announced
The board of directors sanctioned a 17% hike in the quarterly cash dividend. The increased dividend stands at 70 cents per common share, which will be paid out on Jun 8, 2023, to shareholders of record as of May 25, 2023.
2023 Guidance
Management forecasts loan growth in the low to mid-teens range for this year, while the earlier guidance was pegged at low-double-digit growth. In 2022, loan growth increased 20% year over year.
The net interest margin is likely to stay decently higher than the 2022 reported figure of 11.04%.
Operating expenses are anticipated to rise less than 10% from the 2022 reported figure of $5,236 million.
The average net charge-off rate is estimated to be 3.5-3.8% compared with the prior mentioned 3.5-3.9%. The mid-point of the revised outlook stands higher than the 2022 figure of 1.82%.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
VGM Scores
At this time, Discover has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. 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
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions 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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Discover Financial Services (DFS) : Free Stock Analysis Report
