Discover Financial Stock Is Down 55% In Less Than 2 Months, Can It Recoup Its Losses?

by Trefis Team
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Discover Financial (NYSE: DFS) stock declined by about 46% between 8th March 2020 and 24th March 2020 (vs. an 18% decline in the S&P 500), and the stock is down almost 55% since 31st January after the WHO declared a global health emergency in light of the coronavirus spread (vs. about 27% decline in the S&P 500 since then). Drawing lessons from the 2008 financial crisis, we see Discover’s stock declined from levels of around $18 in October 2007 (the pre-crisis peak) to levels just $5 in March 2009 (as the markets bottomed out) – implying the company’s stock lost as much as 73% from its approximate pre-crisis peak. This marked a sharper drop than the broader S&P, which fell by 51%.

 

Will Discover Financial stock recover similarly from the coronavirus spread?

  • We compare the performance of Discover Financial against the S&P 500 in our interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: How Did Discover Financial Stock Fare Compared With S&P 500?
  • In fact, Discover Financial recovered strongly post the 2008 crisis to levels of about $13 in early 2010 – rising by 159% between March 2009 and January 2010. In comparison, the S&P 500 bounced back by about 48% over the same period.

Overall, there have been two distinct trends driving the recent sell-off. Firstly, the increasing number of Coronavirus cases outside China is causing mounting concerns of a global economic slowdown. Secondly, crude oil prices plummeted by more than 20% after Saudi Arabia increased production.

The effect was also evident in Discover Financial’s stock as people are focused almost entirely on essentials rather than discretionary and leisure expenses due to economic uncertainty. It means they are not meeting friends and colleagues for drinks, lunch, or dinner, not going to movies, amusement parks, vacation trips, etc. As the credit card giant is heavily dependent on its credit card business (which contributed around 76% of its revenues in 2019), in the wake of a global economic meltdown and widespread panic, the credit card revenues could be negatively impacted due to a drop in consumer demand and loan default. We believe Discover’s Q1 and Q2 results will confirm this reality with a drop in both credit card revenues and transaction volume as well as an increase in loan losses.

If signs of coronavirus containment aren’t clear by the April Q1 earnings time-frame, it’s likely Discover’s stock (along with the broader market) is going to see a continued drop when results confirm tangible reality.

 

What about timing?

Potential for significant gains (of the order of 100+%) in Discover’s stock, with even a partial recovery to pre-coronavirus crisis levels and its timing, hinges on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of coronavirus impact on a diverse set of Discover Financial’s multinational peers, including Capital One and American Express. The complete set of coronavirus impact and timing analyses is available here.

 

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