Discover Financial Stock Is Up 65% In 2 Months, But What’s Next?

by Trefis Team
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Comparing the trend in Discover Financial’s stock (NYSE: DFS) over recent months with its trajectory during and after the Great Recession of 2008. We believe that the stock has room to gain just about 10% more once fears surrounding the coronavirus outbreak are abated. This indicates a stock price of roughly $55. A detailed comparison of Discover Financial’s performance against the S&P 500 is available in our interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: How Did Discover Financial Stock Fare Compared With S&P 500?

The World Health Organization (WHO) declared a global health emergency at the end of January in light of the coronavirus spread. The rally in the equity market continued till February 19 with the S&P 500 reaching a record high, but the trend reversed sharply over the following weeks. DFS stock lost 65% of its value (vs. about 34% decline in the S&P 500) between February 19 and March 23. A bulk of the decline came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Notably, though, the multi-billion dollar stimulus package announced by the U.S. government has helped the stock price recover 65% over recent weeks (vs. about 34% gain in the S&P 500) to its current level of $50.

 

Discover Financial’s Focus On Cards And Personal Lending Makes Its Stock Very Vulnerable In The Event Of A Downturn

Discover Financial Services is a leading credit card issuer in the United States and an electronic payment services company. It is heavily dependent on its credit card business which contributed around 76% of its revenues in 2019. Besides this, personal and student loans also form a sizable part of its business model. The coronavirus outbreak has had a sizable impact on consumer spending, which could lead to lower credit card revenues in the near term – as people are focused almost entirely on essentials rather than discretionary and leisure expenses due to economic uncertainty. Further, an economic slowdown is likely to increase the loan default probability of customers, negatively impacting Discover’s operations. On the flip side, it has a strong customer base which will enable it to drive growth post-Covid-19 crisis.

We believe Discover Financial’s Q2 results will confirm this reality with a drop in both credit card revenues and transaction volumes. More information about Discover Financial’s revenues and forecast for FY 2020-21 are available in our interactive dashboard. That said, we believe investors are overestimating the impact of a slowdown on Discover Financial’s card loan portfolio – very likely due to the possibility of loan defaults driven by expected job losses.

 

Notably, Discover Financial Stock Witnessed Something Similar During The 2008 Downturn

We see DFS stock declined from levels of around $18 in October 2007 (the pre-crisis peak) to roughly $5 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 73% of its value from its approximate pre-crisis peak. This marked a sharper drop than the broader S&P, which fell by about 51%.

However, DFS recovered strongly post the 2008 crisis to about $13 in early 2010 – rising by 159% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.

 

Will Discover Financial’s Stock Recover Similarly From The Current Crisis?

Keeping in mind the fact that DFS stock fell 65% from the market peak on February 19 to the low on March 23 compared to the 73% decline during the 2008 recession, we believe it can potentially recover by (10%) to levels of $55 once economic conditions begin to show signs of improving. This marks a partial recovery to the $76-level DFS stock was at before the coronavirus outbreak gained global momentum.

That said, the actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting U.S. COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of Coronavirus outbreak’s impact on a diverse set of Discover Financial’s peers. The complete set of coronavirus impact and timing analyses is available here.

While Discover Financial’s stock has significant upside potential, we found that Wells Fargo’s stock presents a much higher growth potential.

 

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