Discover Financial Stock To Beat The Earnings Consensus In Q4?

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Trefis
DFS: Discover Financial Services logo
DFS
Discover Financial Services

Discover Financial (NYSE: DFS) is scheduled to report its fiscal Q4 2022 results on Wednesday, January 18, 2023 (after market close). We expect Discover Financial to beat the consensus estimates of earnings, but revenues will slightly miss the mark. The credit card giant posted total revenues of $3.5 billion in the last quarter – up 25% y-o-y, driven by growth in net interest income (NII) and noninterest revenues. Notably, the NII benefited from higher outstanding loan balances and improvement in the interest rate environment. We expect the same trend to continue in the fourth quarter.

Our forecast indicates that Discover Financial’s valuation is $119 per share, which is 11% above the current market price of close to $107. Our interactive dashboard analysis on Discover Financial’s Earnings Preview has more details. 

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(1) Revenues expected to remain just below the consensus estimates

Discover Financial’s revenues increased 5% y-o-y to $9.6 billion in the first three quarters of 2022. It was because of a 13% y-o-y rise in the net interest income, partially offset by a 21% decrease in the noninterest revenues.

  • The company derives more than 80% of its total revenues from net interest income. It grew 13% y-o-y in the first three quarters due to an improvement in net interest margin and loan growth. We expect the same trend to continue in the fourth quarter.
  • The noninterest revenues decreased 21% y-o-y to $1.67 billion in the first nine months. It was primarily because of lower unrealized gains on equity investments. That said, the discount/interchange fees and loan fees improved over the same period. We expect Q4 results to be on similar lines. 
  • Overall, we estimate Discover Financial’s revenues to remain around $13.2 billion for the full-year 2022.

Trefis estimates Discover Financial’s fiscal Q4 2022 revenues to be around $3.59 billion, slightly below the $3.66 billion consensus estimate. 

(2) EPS is likely to beat the consensus estimates

Discover Financial Q4 2022 adjusted earnings per share (EPS) is expected to be $3.93 per Trefis analysis, almost 8% above the consensus estimate of $3.65. The adjusted net income was reduced by 24% y-o-y to $3.3 billion in the first nine months of 2022. It was mainly due to an increase in noninterest expenses and higher provisions for credit losses. However, we expect the profitability numbers to see some improvement in Q4. Overall, Discover Financial is likely to report an annual GAAP EPS of $15.65 for the full-year 2022. 

(3) Stock price estimate is 11% more than the current market price

We arrive at Discover Financial’s valuation, using an EPS estimate of around $15.65 and a P/E multiple of just below 8x in fiscal 2022. This translates into a price of $119, which is 11% above the current market price of around $107. 

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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 Returns Jan 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
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[1] Month-to-date and year-to-date as of 1/16/2023
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