Discover Financial (NYSE: DFS) is scheduled to report its fiscal Q2 2021 results on Thursday, July 22. We expect Discover Financial to miss the consensus estimates for revenues and earnings. While the credit card giant managed to top the consensus estimates in the last quarter, its revenues decreased on a year-on-year basis. The drop was due to lower net interest income (NII) followed by some decline in the non-interest revenues. On the flip side, the company posted strong growth in its profitability, thanks to the drop in provisions for credit losses. We expect the NII to continue to suffer in the second quarter, however, non-interest revenues are likely to benefit from some recovery in the consumer spending levels. Further, provisions are likely to see a favorable decrease in the second quarter, too.
Our forecast indicates that Discover Financial’s valuation is around $108 per share, which is 7% below the current market price of around $117. Look at our interactive dashboard analysis on Discover Financial’s pre-earnings: What To Expect in Q2? for more details.
(1) Revenues expected to just miss the consensus estimates in Q2
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Trefis estimates Discover Financial’s fiscal Q2 2021 revenues to be around $2.83 billion, marginally below the $2.90 billion consensus estimate. The firm’s revenues of $11.1 billion in 2020 were 3% below the 2019 figure, driven by a slight drop in the direct banking segment which generates close to 95% of the total revenues. The segment suffered due to lower consumer spending levels and interest rate headwinds. Further, the same trend continued in the first quarter of 2021. That said, we expect the consumer spending levels to see some improvement in the second quarter, benefiting the outstanding loan balances and transaction volumes. However, the NII will likely suffer in Q2, as well.
Although interest rates are unlikely to see an immediate recovery to the pre-Covid-19 levels, improvement in consumer spending levels will likely drive the DFS top-line in 2021. The company is expected to touch $11.4 billion in the year. Our dashboard on Discover Financial’s revenues offers more details on the company’s segments.
2) EPS is likely to miss the consensus estimates
Discover Financial’s Q2 2021 adjusted earnings per share (EPS) is expected to be $3.45 per Trefis analysis, almost 9% below the consensus estimate of $3.75. The company increased its provisions for credit losses in 2020 from $3.2 billion to $5.1 billion, to cater for the higher risk of loan defaults. It took a toll on its adjusted net income, reducing it by 62% y-o-y. That said, DFS has decreased its provisions over the recent quarters. Notably, provision for credit losses decreased to -$365 million in the first quarter, as compared to $1.8 billion in the year-ago period, improving its EPS from -$0.25 to $5.04. We expect the same trend to continue in the FY2021 Q2 results.
Moving forward, we expect the company’s net income margin to improve in the current year, due to a favorable decrease in the provisions. It will lead to an EPS of $9.51 in FY2021.
(3) Stock price estimate 7% lower than the current market price
Going by our Discover Financial’s valuation, with an EPS estimate of around $9.51 and a P/E multiple of just above 11x in fiscal 2021, this translates into a price of $108, which is 7% below the current market price of around $117.
Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year
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