Discover Financial stock (NYSE: DFS) has lost roughly 6% YTD, as compared to the 14% drop in the S&P500 over the same period. Further, at its current price of $108 per share, it is trading 9% below its fair value of $119 – Trefis’ estimate for Discover Financial’s valuation. The credit card giant posted mixed results in the third quarter of 2022, with revenues beating expectations but earnings missing the mark. The top line increased 25% y-o-y to $3.48 billion, mainly driven by an 18% rise in net interest income (NII) and a 71% jump in noninterest revenues. The NII benefited from higher loan growth and improvement in the interest rate environment. Similarly, the growth in noninterest revenues was driven by an increase in discount/interchange fees, higher loan fee income, and a drop in unrealized losses on equity investments. On the cost front, the provisions for credit losses increased from $185 million to $773 million in the quarter. Further, the noninterest expenses as a % of revenues also witnessed an unfavorable rise. Overall, it resulted in an 8% y-o-y decrease in the adjusted net income to $967 million.
The company’s net revenues increased 5% y-o-y to $9.6 billion in the first nine months of FY 2022. It was due to a 13% y-o-y growth in the net interest income, partially offset by a 21% drop in the noninterest revenues. Further, the total Discover card purchase volume improved by 19% y-o-y over the same period. That said, the adjusted net income was reduced by 24% y-o-y to $3.3 billion, primarily due to higher noninterest expenses and build-up in provisions for credit losses.
Moving forward, we expect the NII and purchase volumes to continue their growth trajectory in Q4. Altogether, Discover Financial’s revenues are estimated to touch $13.2 billion in FY2022. Additionally, DFS’s adjusted net income margin, which increased from 10% to 44.3% in 2021, is expected to normalize around 34% in this year. It will likely result in an adjusted net income of $4.44 billion and an annual EPS of $15.65. This coupled with a P/E multiple of just below 8x will lead to a valuation of $119.
|S&P 500 Return||0%||-14%||82%|
|Trefis Multi-Strategy Portfolio||0%||-17%||227%|
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 Month-to-date and year-to-date as of 12/1/2022
 Cumulative total returns since the end of 2016