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Can PULSE Business Growth Propel Discover's (DFS) Q2 Earnings?
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Discover Financial Services (DFS - Free Report) is expected to post an earnings beat in its second-quarter 2024 results, scheduled to be released on Jul 17, after the closing bell.
The Zacks Consensus Estimate for earnings per share is pegged at $3.06, which witnessed 10 upward estimate revisions compared with none down over the past 60 days. During this time, the estimate gained 4.8%. However, the estimate indicates a decline of 13.6% from the prior-year quarter’s reported figure. On the other hand, the consensus estimate for second-quarter revenues is $4.2 billion, implying 7.3% growth from the year-ago quarter’s figure.
Image Source: Zacks Investment Research
Earnings Surprise History
Discover Financial’s bottom line missed the consensus estimate in each of the trailing four quarters, with the average surprise being negative 30.64%. This is depicted in the figure below:
Image Source: Zacks Investment Research
What Our Quantitative Model Unveils
Our proven model predicts an earnings beat for Discover Financial this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat, which is the case here.
Earnings ESP: Discover Financial has an Earnings ESP of +1.26% because the Most Accurate Estimate of $3.10 is pegged higher than the Zacks Consensus Estimate of $3.06. You can uncover the best stocks before they’re reported with our Earnings ESP Filter.
Zacks Rank: DFS currently carries a Zacks Rank of 3.
Factors Likely to Shape Q2 Results
Discover Financial’s revenues are expected to have gained on resilient transaction volumes and higher net interest income, which in turn, is likely to have been driven by growing average receivables in the second quarter.
The Zacks Consensus Estimate for net interest income is pegged at $3.44 billion, implying 8.4% growth from the prior-year quarter’s reported figure. Our estimate for the metric is $3.37 billion.
Higher new account acquisitions and lower payment rates are expected to have boosted average receivable growth in the quarter. However, DFS’ net interest margin is likely to have been hurt by elevated net funding costs. The consensus mark for net interest margin is 10.89%, which indicates a deterioration of 17 basis points year over year.
Increased non-interest income is also likely to have contributed to revenue growth in the second quarter. The metric is expected to have benefited on the back of improved net discount and interchange revenues, loan fee income and transaction processing revenues derived from its PULSE business.
The Zacks Consensus Estimate for non-interest income is pegged at $716 million, indicating a 2.1% increase year over year. Our estimate for the metric is $745.2 million.
While improved net interest income is likely to have aided the results of the Digital Banking segment, higher PULSE volume resulting from increased debit transaction volume is expected to have benefited the Payment Services unit.
However, the bottom line of Discover Financial is likely to have suffered a blow due to escalating compensation costs, marketing expenses and professional fees. While compensation costs are expected to have witnessed an increase due to higher technology resources and severance linked with organizational changes, professional fees are expected to have been affected by investments in compliance and risk management initiatives as well as increased recovery fees and merger-related costs.
We anticipate total operating costs to increase 4.6% year over year in the second quarter.
Conclusion
Discover Financial's revenue growth from higher net interest and non-interest income is likely to have been offset by increased operating costs and net funding costs, which is expected to have reduced net interest margin. Despite the headwinds troubling the company, strong PULSE volume, receivables growth and growing transaction volume make the stock a compelling hold for investors now.
Other Stocks That Warrant a Look
Here are some other companies from the Finance space, which according to our model, have the right combination of elements to beat on earnings this time around:
The Zacks Consensus Estimate for ESS’ second-quarter earnings is pegged at $3.85 per share, indicating 2.1% growth from the year-ago quarter’s reported number. The consensus mark for earnings has moved 0.3% north in the past seven days.
Federated Hermes, Inc. (FHI - Free Report) has an Earnings ESP of +0.67% and a Zacks Rank of 3, at present. The Zacks Consensus Estimate for FHI’s second-quarter earnings is 87 cents per share, indicating 7.4% growth from the year-ago quarter’s reported figure.
Federated Hermes’ earnings beat estimates in three of the trailing four quarters and matched the mark once, the average surprise being 5.11%.
AssetMark Financial Holdings, Inc. (AMK - Free Report) has an Earnings ESP of +0.51% and a Zacks Rank of 3, currently. The Zacks Consensus Estimate for AMK’s second-quarter earnings is pegged at 66 cents per share, indicating a 20% improvement from the year-ago quarter’s reported figure.
AssetMark Financial’s earnings beat estimates in two of the trailing four quarters and missed the mark twice, the average surprise being 0.86%.
Image: Bigstock
Can PULSE Business Growth Propel Discover's (DFS) Q2 Earnings?
Discover Financial Services (DFS - Free Report) is expected to post an earnings beat in its second-quarter 2024 results, scheduled to be released on Jul 17, after the closing bell.
The Zacks Consensus Estimate for earnings per share is pegged at $3.06, which witnessed 10 upward estimate revisions compared with none down over the past 60 days. During this time, the estimate gained 4.8%. However, the estimate indicates a decline of 13.6% from the prior-year quarter’s reported figure. On the other hand, the consensus estimate for second-quarter revenues is $4.2 billion, implying 7.3% growth from the year-ago quarter’s figure.
Image Source: Zacks Investment Research
Earnings Surprise History
Discover Financial’s bottom line missed the consensus estimate in each of the trailing four quarters, with the average surprise being negative 30.64%. This is depicted in the figure below:
Image Source: Zacks Investment Research
What Our Quantitative Model Unveils
Our proven model predicts an earnings beat for Discover Financial this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat, which is the case here.
Earnings ESP: Discover Financial has an Earnings ESP of +1.26% because the Most Accurate Estimate of $3.10 is pegged higher than the Zacks Consensus Estimate of $3.06. You can uncover the best stocks before they’re reported with our Earnings ESP Filter.
Zacks Rank: DFS currently carries a Zacks Rank of 3.
Factors Likely to Shape Q2 Results
Discover Financial’s revenues are expected to have gained on resilient transaction volumes and higher net interest income, which in turn, is likely to have been driven by growing average receivables in the second quarter.
The Zacks Consensus Estimate for net interest income is pegged at $3.44 billion, implying 8.4% growth from the prior-year quarter’s reported figure. Our estimate for the metric is $3.37 billion.
Higher new account acquisitions and lower payment rates are expected to have boosted average receivable growth in the quarter. However, DFS’ net interest margin is likely to have been hurt by elevated net funding costs. The consensus mark for net interest margin is 10.89%, which indicates a deterioration of 17 basis points year over year.
Increased non-interest income is also likely to have contributed to revenue growth in the second quarter. The metric is expected to have benefited on the back of improved net discount and interchange revenues, loan fee income and transaction processing revenues derived from its PULSE business.
The Zacks Consensus Estimate for non-interest income is pegged at $716 million, indicating a 2.1% increase year over year. Our estimate for the metric is $745.2 million.
While improved net interest income is likely to have aided the results of the Digital Banking segment, higher PULSE volume resulting from increased debit transaction volume is expected to have benefited the Payment Services unit.
However, the bottom line of Discover Financial is likely to have suffered a blow due to escalating compensation costs, marketing expenses and professional fees. While compensation costs are expected to have witnessed an increase due to higher technology resources and severance linked with organizational changes, professional fees are expected to have been affected by investments in compliance and risk management initiatives as well as increased recovery fees and merger-related costs.
We anticipate total operating costs to increase 4.6% year over year in the second quarter.
Conclusion
Discover Financial's revenue growth from higher net interest and non-interest income is likely to have been offset by increased operating costs and net funding costs, which is expected to have reduced net interest margin. Despite the headwinds troubling the company, strong PULSE volume, receivables growth and growing transaction volume make the stock a compelling hold for investors now.
Other Stocks That Warrant a Look
Here are some other companies from the Finance space, which according to our model, have the right combination of elements to beat on earnings this time around:
Essex Property Trust, Inc. (ESS - Free Report) has an Earnings ESP of +0.50% and a Zacks Rank of 2, currently. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
The Zacks Consensus Estimate for ESS’ second-quarter earnings is pegged at $3.85 per share, indicating 2.1% growth from the year-ago quarter’s reported number. The consensus mark for earnings has moved 0.3% north in the past seven days.
Federated Hermes, Inc. (FHI - Free Report) has an Earnings ESP of +0.67% and a Zacks Rank of 3, at present. The Zacks Consensus Estimate for FHI’s second-quarter earnings is 87 cents per share, indicating 7.4% growth from the year-ago quarter’s reported figure.
Federated Hermes’ earnings beat estimates in three of the trailing four quarters and matched the mark once, the average surprise being 5.11%.
AssetMark Financial Holdings, Inc. (AMK - Free Report) has an Earnings ESP of +0.51% and a Zacks Rank of 3, currently. The Zacks Consensus Estimate for AMK’s second-quarter earnings is pegged at 66 cents per share, indicating a 20% improvement from the year-ago quarter’s reported figure.
AssetMark Financial’s earnings beat estimates in two of the trailing four quarters and missed the mark twice, the average surprise being 0.86%.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.