Discover Financial (NYSE: DFS) is scheduled to report its fiscal Q1 2022 results on Wednesday, April 27 (after market close). We expect Discover Financial to beat the consensus estimates of revenues but earnings are likely to remain below the mark. The credit card giant posted mixed results in the last quarter, with earnings outperforming the estimates but revenues missing the expectations. It reported total revenues of $2.94 billion – up 4% y-o-y. The growth was driven by an increase in the net interest income (NII) and higher discount and interchange revenue. While the growth in NII was because of higher net interest margin and outstanding loan balances, the non-interest revenues benefited from the recovery in the card purchase volume – up 25% y-o-y. We expect the same trend to continue in the first quarter.
Our forecast indicates that Discover Financial’s valuation is $144 per share, which is 31% above the current market price of close to $110. Our interactive dashboard analysis on Discover Financial’s Earnings Preview has more details.
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(1) Revenues expected to edge past the consensus estimates
Discover Financial’s revenues increased 9% y-o-y in 2021 to $12.1 billion, primarily due to a 6% growth in digital banking revenues, followed by a 98% jump in the payment services business.
- The company derives more than 90% of its total revenues from the digital banking segment. It grew 6% y-o-y, partly due to some improvement in the NII and partly because of a 33% jump in the discount and interchange revenue. The NII primarily benefited from a higher net interest margin on the credit cards, partially offset by lower outstanding loan balances. Further, the discount and interchange fees rose due to higher card transaction volume, led by a recovery in consumer spending levels. We expect the net interest margin and card transaction volumes to further improve in the first quarter.
- The payment services revenues grew 98% y-o-y in 2021. It was because of a 17% increase in the payment services transaction volumes and higher fees as a % of transaction volume. We expect the same momentum to continue in the first-quarter results.
- Overall, we expect Discover Financial’s revenues to remain around $12.5 billion for full-year 2022.
Trefis estimates Discover Financial’s fiscal Q1 2022 revenues to be around $3.03 billion, 2% above the $2.98 billion consensus estimate. We expect the growth in NII and card transaction volumes to drive the first-quarter results.
The Federal Reserve has hiked the interest rates by a quarter percentage point in March, which is anticipated to be followed by multiple rate hikes in FY2022. This move will likely benefit Discover Financial’s net interest margin. Further, average loan balance and card transaction volumes will likely improve with the recovery in the economy. Our dashboard on Discover Financial’s revenues offers more details on the company’s operating segments along with our forecast for FY2022.
(2) EPS is likely to remain slightly below the consensus estimates
Discover Financial Q1 2022 adjusted earnings per share (EPS) is expected to be $3.51 per Trefis analysis, almost 3% below the consensus estimate of $3.62. The company’s adjusted net income increased 385% to $5.4 billion, mainly due to a favorable reduction in provisions for credit losses from $5.1 billion to $218 million. Notably, the adjusted net margin increased from 10% to 44.3%.
The unusual spike in net income margin was due to the lower provisions figure. We expect the net income margin to normalize around 30% in 2022. Overall, Discover Financial is likely to report an adjusted net income of $3.7 billion and annual EPS of $12.92 for full-year 2022.
(3) Stock price estimate is 31% more than the current market price
We arrive at Discover Financial’s valuation, using an EPS estimate of around $12.92 and a P/E multiple of just above 11x in fiscal 2022. This translates into a price of $144, which is 31% above the current market price of around $110.
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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