Discover Financial Earnings Preview: Will Discover Financial Report An Earnings Miss For FY 2019?

by Trefis Team
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Discover Financial (NYSE: DFS) will release its Q4 and full-year 2019 results on Thursday, January 23. Trefis details expectations from the card & payments giant in an interactive dashboard, parts of which we highlight below. We believe that Discover Financial will likely report a revenues beat for FY19, although its earnings would miss consensus. We expect the company’s revenues to increase to $11.48 billion primarily due to growth in student & personal loans and higher credit card loans, which would marginally beat the consensus estimate of $11.46 billion. Also, the EPS figure would improve to $8.79 due to a combination of higher revenues and a steady decrease in shares outstanding. However, it would miss consensus earnings estimate of $9.07. Further, we believe that weaker-than-expected earnings for FY 2019 would overshadow the revenue beat, resulting in a slight negative movement in the Discover Financial’s stock price once earnings are announced. Our forecast indicates that Discover Financial’s valuation is $90 a share, which is roughly 5% above its current price.

Trefis shines the spotlight on key assumptions and data for Discover Financial, and our hypothesis lays out one possible set of expectations. You can chime in with your expectations for Discover Financial’s FY19 earnings in our interactive dashboard.

(1) Discover Financial’s revenues would have increased by 7.2% from $10.7 billion in 2018 to $11.5 billion in 2019; slightly above consensus estimates

  • Trefis estimates Discover Financial’s 2019 revenues to be $11.48 billion, marginally above the consensus estimate of $11.46 billion.
  • Discover Financial’s Net Revenues have grown at an average annual rate of 8.5% from $9.1 billion in 2016 to $10.7 billion in 2018 and are expected to have grown at a similar pace in 2019, enabling it to cross $11.5 billion.
  • This would primarily be driven by around a 7% increase in the Direct Banking segment due to an 8% jump in credit cards revenue and 5% growth in other loans.
  • Further, credit card and other loan revenues are expected to improve due to higher outstanding card loans and growth in students & personal loans respectively.
  • Notably, we expect Discover Financial to add $1.5 billion in incremental revenues over 2019-2020, $800 million in 2019, and $700 million in 2020.

Our interactive dashboard analysis, ‘Discover Financial Revenues: How Does Discover Financial Make Money?’, provides an in-depth view of the company’s revenues along with our forecasts for 2020.

 

(2) EPS is likely to increase by 12.7% from $7.79 in 2018 to $8.79 in 2019, which is slightly below the consensus estimates

  • We expect Discover Financial’s 2019 earnings per share (EPS) to be $8.79 per Trefis analysis, 3% lower than the consensus estimate of $9.07 per share.
  • An increase in Revenues as detailed above, coupled with a steady reduction in Shares Outstanding, will drive EPS growth despite an expected increase in Total Expenses by 7.6% mainly due to an uptick in Compensation Expenses and Marketing & Advertising cost.
  • As we forecast Discover Financial’s Revenues to grow at a slower rate than Expenses in 2019 (7.2% vs. 7.6%), this will result in a slight reduction in DFS’s Net Income Margin figure from 25.1% in 2018 to 24.9% in 2019.
  • For 2020, we believe that revenue and expenses would grow at a similar rate, enabling the net income margin figure to hover around the 2019 figure of 24.9%.

 

(3) Stock price estimate ~5% higher than the market price

  • A trailing P/E multiple of 10.3x looks appropriate for Discover Financial’s stock, as opposed to the current implied P/E multiple of 9.3x
  • Trefis’ forecast for Discover Financial’s 2019 earnings is slightly lower than the market estimates, although the P/E multiple is higher. This works out to a fair value of $90 for Discover Financial’s stock as opposed to the current market price around $84.

 

See all Trefis Price Estimates and Download Trefis Data here

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