Earnings Review: Discover’s Sluggish Momentum Continues

-3.83%
Downside
120
Market
116
Trefis
DFS: Discover Financial Services logo
DFS
Discover Financial Services

Discover Financial Services (NYSE: DFS) reported its earnings for the second quarter of the fiscal year 2016 on Tuesday, July 19th. The company reported a 10.5% year-over-year increase in earnings per share (EPS) to $ 1.46 on the back of a 1.9% increase in total revenue. Discover’s business revolves around its direct banking segment and its credit card services, which allow it multiple revenue streams including transaction fees, processing fees and merchant fees for accessing its payment network and identity protection services in addition to the interest income generated from outstanding credit card loans. The results were mostly inline with our pre-earnings expectations.

Given Discover’s run ins with regulatory authorities and weak consumer demand in the U.S., the growth in income from services built around its credit card business has been low. In the second quarter, revenue from all services except for interest income declined compared to last year. Discover Card Transaction and Execution Fees declined by over 10% year over year. The 1.9% increase in overall revenue was mostly a result of the 7% growth in interest income but this growth comes at the expense a 34.6% increase in provisions for loan losses. Consequently, pre-tax income declined by close to 5% year over year. A one time tax benefit of $44 million and $425 million spent on share repurchases boosted earnings per share to $1.46 from last year’s $1.33. This trend is consistent with the last five years in which Discover’s share buyback activity has propped up its EPS, even as core business segments decline. Excluding the impact of share buybacks, earnings per share rose by a modest 2.4%, largely the impact of the one-time tax benefit, which contributed $ 0.11 to the bottom line.

dfs earnings

Have more questions about Discover? See the links below:

Relevant Articles
  1. Up 14% YTD, What’s Next For Discover Financial Stock?
  2. Discover Financial Stock Is Undervalued
  3. Discover Financial Stock Is Fairly Priced At The Current Levels
  4. Discover Financial Stock To Edge Past The Revenue Consensus In Q1
  5. Discover Financial Stock Is Attractive At The Current Levels
  6. Discover Financial Stock To Beat The Earnings Consensus In Q4?

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Discover
Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap |More Trefis Research