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Why Is Discover (DFS) Up 8.5% Since Last Earnings Report?
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It has been about a month since the last earnings report for Discover (DFS - Free Report) . Shares have added about 8.5% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Discover due for a pullback? 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 drivers.
Discover Financial Beats on Q2 Earnings, Suspends Share Repurchases
Discover Financial Services reported second-quarter 2022 adjusted earnings of $3.96 per share, which beat the Zacks Consensus Estimate by 5.6%. However, the bottom line plunged 29% year over year.
DFS’s revenues — net of interest expenses — amounted to $3,224 million, which declined 10% year over year. However, the top line beat the consensus mark by 2.2%.
Improved PULSE and Network Partners revenues, higher global travel and entertainment spending, and margin expansions supported the better-than-expected second-quarter results. The positives were partially offset by elevated marketing and business development, employee compensation and benefitscosts, and weak Payment Services performance.
Operational Update
Operating efficiency (total operating expense divided by revenues net of interest expense) came in at 37.9%, which increased 380 basis points (bps) year over year in the second quarter.
Total operating expenses marginally increased year over year to $1,223 million mainly due to increased marketing and business development and employee compensation and benefits, which were partially offset by lower information processing and communications, and other costs.
Interest expenses of $305 million increased 5% year over year in the quarter under review.
Net income of Discover Financial plunged 35% year over year to $1,111 million in the quarter under review.
Segmental Performance
Digital Banking Segment
The segment reported a pre-tax income of $1,432 million, which declined 6% year over year in the second quarter. The decline was due to increased provision for credit losses and elevated operating expenses, partly offset by higher revenues net of interest expense. The provision for credit losses jumped to $549 million in the second quarter, from $135 million a year ago.
At second-quarter end, total loans of $99,301 million advanced 13% year over year. While credit card loans increased 15% year over year to $79,237 million, total private student loans grew 2% year over year to $10,074 million. Personal loans increased 4% year over year to $7,145 million.
Net interest income rose 14% year over year to $2,610 million on the back of improved average receivables and expanded net interest margin. Net interest margin came in at 10.94%, which improved 26 bps year over year in the quarter under review.
Payment Services Segment
The segment's pretax income of $20 million plunged 97% year over year. The performance of the segment was hurt by reduced revenues stemming from a net loss on equity investments. Nevertheless, improved PULSE and Network Partners revenues partly offset the downside. Payment Services volume increased 6% year over year to $82,905 million for the second quarter.
PULSE dollar volume was in line with the year-ago figure due to subsiding spending on debit products linked with the end of federal stimulus. While Diners Club volume climbed 37% year over year driven by higher global travel and entertainment spending, better AribaPay volume led to a 22% year-over-year rise in Network Partners volume.
Financial Position (as of Jun 30, 2022)
Discover Financial exited the second quarter with total assets of $114.6 billion, which rose 3% year over year. The liquidity portfolio (comprising cash and cash equivalents and other investments but excluding cash-in-process) plunged 30% year over year to $16.2 billion.
Borrowings at second-quarter end were at around $20 billion, up 3% year over year. Total liabilities of nearly $100.8 billion increased 3% year over year. Meanwhile, total equity grew 5% year over year to $13.8 billion.
Capital Deployment
Discover Financial bought back shares worth $601 million in the second quarter. Shares of common stock outstanding decreased by 2% sequentially. As such, the company might have $3.6 billion remaining under its share buyback program. However, DFS suspended its stock buyback program due to an internal investigation of its student loan servicing practices.
The board of directors announced a quarterly cash dividend of 60 cents per common share, which will be paid out on Sep 8, 2022, to shareholders of record on Aug 25.
2022 Guidance
The company expects loan growth to be in low teens, up from the prior estimate of high single digits. The average net charge-off rate is projected between 1.9-2.1% compared with the prior outlook of 2.2-2.4%.
It reiterated the mid-single digit rise forecast for total operating expenses. Net interest margin is estimated to witness improvement within 5-15 bps when compared with the first-quarter 2022 figure.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month.
The consensus estimate has shifted 5.14% due to these changes.
VGM Scores
Currently, Discover has a subpar Growth Score of D, 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 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.
Performance of an Industry Player
Discover belongs to the Zacks Financial - Consumer Loans industry. Another stock from the same industry, Ally Financial (ALLY - Free Report) , has gained 6.7% over the past month. More than a month has passed since the company reported results for the quarter ended June 2022.
Ally Financial reported revenues of $2.08 billion in the last reported quarter, representing a year-over-year change of -0.4%. EPS of $1.76 for the same period compares with $2.33 a year ago.
Ally Financial is expected to post earnings of $1.83 per share for the current quarter, representing a year-over-year change of -15.3%. Over the last 30 days, the Zacks Consensus Estimate has changed -2.8%.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Ally Financial. Also, the stock has a VGM Score of C.
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Why Is Discover (DFS) Up 8.5% Since Last Earnings Report?
It has been about a month since the last earnings report for Discover (DFS - Free Report) . Shares have added about 8.5% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Discover due for a pullback? 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 drivers.
Discover Financial Beats on Q2 Earnings, Suspends Share Repurchases
Discover Financial Services reported second-quarter 2022 adjusted earnings of $3.96 per share, which beat the Zacks Consensus Estimate by 5.6%. However, the bottom line plunged 29% year over year.
DFS’s revenues — net of interest expenses — amounted to $3,224 million, which declined 10% year over year. However, the top line beat the consensus mark by 2.2%.
Improved PULSE and Network Partners revenues, higher global travel and entertainment spending, and margin expansions supported the better-than-expected second-quarter results. The positives were partially offset by elevated marketing and business development, employee compensation and benefitscosts, and weak Payment Services performance.
Operational Update
Operating efficiency (total operating expense divided by revenues net of interest expense) came in at 37.9%, which increased 380 basis points (bps) year over year in the second quarter.
Total operating expenses marginally increased year over year to $1,223 million mainly due to increased marketing and business development and employee compensation and benefits, which were partially offset by lower information processing and communications, and other costs.
Interest expenses of $305 million increased 5% year over year in the quarter under review.
Net income of Discover Financial plunged 35% year over year to $1,111 million in the quarter under review.
Segmental Performance
Digital Banking Segment
The segment reported a pre-tax income of $1,432 million, which declined 6% year over year in the second quarter. The decline was due to increased provision for credit losses and elevated operating expenses, partly offset by higher revenues net of interest expense. The provision for credit losses jumped to $549 million in the second quarter, from $135 million a year ago.
At second-quarter end, total loans of $99,301 million advanced 13% year over year. While credit card loans increased 15% year over year to $79,237 million, total private student loans grew 2% year over year to $10,074 million. Personal loans increased 4% year over year to $7,145 million.
Net interest income rose 14% year over year to $2,610 million on the back of improved average receivables and expanded net interest margin. Net interest margin came in at 10.94%, which improved 26 bps year over year in the quarter under review.
Payment Services Segment
The segment's pretax income of $20 million plunged 97% year over year. The performance of the segment was hurt by reduced revenues stemming from a net loss on equity investments. Nevertheless, improved PULSE and Network Partners revenues partly offset the downside. Payment Services volume increased 6% year over year to $82,905 million for the second quarter.
PULSE dollar volume was in line with the year-ago figure due to subsiding spending on debit products linked with the end of federal stimulus. While Diners Club volume climbed 37% year over year driven by higher global travel and entertainment spending, better AribaPay volume led to a 22% year-over-year rise in Network Partners volume.
Financial Position (as of Jun 30, 2022)
Discover Financial exited the second quarter with total assets of $114.6 billion, which rose 3% year over year. The liquidity portfolio (comprising cash and cash equivalents and other investments but excluding cash-in-process) plunged 30% year over year to $16.2 billion.
Borrowings at second-quarter end were at around $20 billion, up 3% year over year. Total liabilities of nearly $100.8 billion increased 3% year over year. Meanwhile, total equity grew 5% year over year to $13.8 billion.
Capital Deployment
Discover Financial bought back shares worth $601 million in the second quarter. Shares of common stock outstanding decreased by 2% sequentially. As such, the company might have $3.6 billion remaining under its share buyback program. However, DFS suspended its stock buyback program due to an internal investigation of its student loan servicing practices.
The board of directors announced a quarterly cash dividend of 60 cents per common share, which will be paid out on Sep 8, 2022, to shareholders of record on Aug 25.
2022 Guidance
The company expects loan growth to be in low teens, up from the prior estimate of high single digits. The average net charge-off rate is projected between 1.9-2.1% compared with the prior outlook of 2.2-2.4%.
It reiterated the mid-single digit rise forecast for total operating expenses. Net interest margin is estimated to witness improvement within 5-15 bps when compared with the first-quarter 2022 figure.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month.
The consensus estimate has shifted 5.14% due to these changes.
VGM Scores
Currently, Discover has a subpar Growth Score of D, 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 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.
Performance of an Industry Player
Discover belongs to the Zacks Financial - Consumer Loans industry. Another stock from the same industry, Ally Financial (ALLY - Free Report) , has gained 6.7% over the past month. More than a month has passed since the company reported results for the quarter ended June 2022.
Ally Financial reported revenues of $2.08 billion in the last reported quarter, representing a year-over-year change of -0.4%. EPS of $1.76 for the same period compares with $2.33 a year ago.
Ally Financial is expected to post earnings of $1.83 per share for the current quarter, representing a year-over-year change of -15.3%. Over the last 30 days, the Zacks Consensus Estimate has changed -2.8%.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Ally Financial. Also, the stock has a VGM Score of C.