Discover Financial Earnings Preview: What We’re Watching

by Trefis Team
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Discover Financial (NYSE:DFS) is scheduled to announce its fiscal second quarter earnings on June 19. [1] The company has performed strongly over the past few quarters and reported a 36% year-on-year increase in profits, from $465 million to $631 million, in the last quarter. Discover will be the first electronic payment services provider to report its earnings this quarter, and its results will provide insights on consumer spending trends and be an indicator of the performances of other credit card issuers such as Visa (NYSE:V) , MasterCard (NYSE:MA) and American Express (NYSE:AXP).

See our complete analysis of Discover Financial here

Debit cards on the wane

Debit cards, although gaining popularity, have been hit hard by the Durbin amendment to the Dodd-Frank bill, which came into effect last October. The amendment drastically reduced interchange fees charged by banks on debit card transactions, thus discouraging banks and card companies from promoting the growth of debit cards.

Visa reported a 12% drop in consumer spend through debit card transactions in April, and while Discover’s modus operandi is quite different from its peers, we expect a decline in the use of debit cards throughout the U.S. (See Visa’s Charged Up For $126 Despite Debit Fees Taking Some Lumps) We will keep a close eye on Discover’s debit card performance to gauge the impact that the recent developments will have on the industry as a whole.

Strong position in loans department

Discover Financial recently entered the U.S. home loans market. We believe this move by the company comes at a right time, as mortgage delinquency rates in the country have dropped to a four-year low of 7.4%, on a seasonally adjusted average. (See Discover Financial Enters The Mortgage Business At Just The Right Time) The housing industry is set to pick up this quarter, holding the company in good stead.

Discover also made an entry into student loans last year, with the acquisition of Citigroup’s (NYSE:C) $2.5 billion student loan portfolio in September. The company’s loan financing division performed well in the first quarter of 2012, as over $10 billion were accumulated in receivables from student and personal loans. We expect the division to continue to perform strongly as the company diversifies its operations.

Expansion in the east

Credit card companies have been looking eastward for growth as Asian economies, particularly India and China, have been growing rapidly in the past few years. Discover Financial has also shown keen interest in the region. The company recently announced an alliance with the National Payments Corporation of India (NPCI) to capitalize on the country’s developing economy and saw a 58% year-on-year growth in credit card transaction volumes in 2011. (See India’s Booming Card Market Attracts Discover Financial) We expect strong performance by the company in Asia as its card acceptance in the region continues to grow alongside growth in the economy.

We have a $26 price estimate for Discover Financial’s stock, which is 20% below the market price. We will adjust our price estimate following the results.

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  1. Discover Financial Services Announces Second Quarter 2012 Earnings Release and Conference Call, Press Release, June 6th, 2012 []
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