Why Is Discover (DFS) Down 7.5% Since Last Earnings Report?

It has been about a month since the last earnings report for Discover (DFS). Shares have lost about 7.5% 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 drivers.

Discover Financial's Q3 Earnings Beat, Revenues Up Y/Y

Discover Financial delivered third-quarter 2021 adjusted earnings of $3.54 per share, which outpaced the Zacks Consensus Estimate by 3.5%. The bottom line improved 44% year over year.

The company’s results were driven by increased revenues, new account growth and consistently strong credit performance. However, the results were partly offset by escalating costs.

Operational Update

In the reported quarter, the company’s revenues — net of interest expenses — inched up 2% year over year to $2.8 billion. Solid performance of the Digital Banking business contributed to the company’s top-line growth.
However, the top line missed the Zacks Consensus Estimate by 3.9%.
Interest expenses plunged 35.3% year over year to $269 million in the quarter under review.

Total operating expenses escalated 18.4% year over year to $1.2 billion due to rise in costs related to employee compensation and benefits; marketing and business development; information processing & communications; professional fees; and other expenses.

Segmental Update

Digital Banking Segment

The segment’s pre-tax income of $1.5 billion surged 65.3% year over year. The improvement can be attributed to reduced provision for credit losses and increased revenue net of interest expense. However, the same was partly offset by elevated operating costs.

Total loans inched up 1% year over year to $89.5 billion in the third quarter. Likewise, credit card loans increased 1% year over year.

While personal loans fell 4% year over year, private student loans grew 2% year over year. Net interest income advanced 6% year over year, courtesy of favorable funding costs backed by lower market rates and reduced interest charge-offs.

Net interest margin improved 61 basis points year over year to 10.8% in the quarter under review.

Payment Services Segment

The segment reported a pre-tax loss of $114 million, against the prior-year quarter’s income of $42 million.

Payment Services volume expanded 10% year over year to $76.8 billion in the third quarter.

PULSE dollar volume rose 9% year over year on the back of expansion in all debit products resulting from the economic recovery leading to improved spending.

Diners Club volume improved 12% year over year following the revival from the COVID-19 pandemic induced adversities.

Network Partners volume climbed 16% year over year attributable to improved AribaPay volume.

Strong Financial Position (as of Sep 30, 2021)

Discover Financial exited the third quarter with total assets of $108.5 billion, which declined 12.7% year over year.

Total liabilities were $95.3 billion, reflecting a decline of 16.5% year over year.
Meanwhile, total equity increased 29.4% year over year to $13.3 billion.

Share Repurchase and Dividend Update

During the third quarter, the company bought back shares worth $815 million.

Shares of common stock outstanding dipped 2.1% from the prior quarter.

On Oct 19, 2021, the company’s board of directors approved a quarterly cash dividend of 50 cents per share, which will be paid out on Dec 9, 2021 to shareholders of record as on Nov 24, 2021.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 7.26% due to these changes.

VGM Scores

Currently, Discover has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. 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 C. 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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