Up 14% YTD, What’s Next For Discover Financial Stock?

DFS: Discover Financial Services logo
Discover Financial Services

Discover Financial stock (NYSE: DFS) has gained roughly 14% YTD, as compared to the 24% rise in the S&P500 over the same period. Further, at its current price of $112 per share, it is trading at the same level as its fair value ($112) – Trefis’ estimate for Discover Financial’s valuation.

Amid the current financial backdrop, DFS stock has shown strong gains of 20% from levels of $90 in early January 2021 to around $110 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. However, the increase in DFS stock has been far from consistent. Returns for the stock were 28% in 2021, -15% in 2022, and 14% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 (YTD) – indicating that DFS underperformed the S&P in 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Financials sector including V, JPM, and MA, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could DFS face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

The credit card giant posted mixed results in the third quarter of 2023, with revenues beating the consensus but earnings missing the mark. It reported net revenues of $4.04 billion, which is 17% y-o-y more than the year-ago period. It was primarily because of a 17% rise in the net interest income (NII), followed by a 13% increase in the discount & interchange revenues. Notably, the NII was up due to a 19% growth in the total interest-earning assets and a higher interest rate environment. On the cost front, provisions for credit losses witnessed an unfavorable increase from $773 million to $1.7 billion in the quarter. It led to a 34% decrease in the adjusted net income to $647 million.

Relevant Articles
  1. Discover Financial Stock Topped The Estimates In Q2, Where Is It Headed?
  2. Discover Financial Stock Is Beating S&P500 In YTD Returns, What To Expect From Q2 Results?
  3. Up 8% YTD, What To Expect From Discover Financial Stock In Q1?
  4. Discover Financial Stock Is Undervalued
  5. Discover Financial Stock Is Fairly Priced At The Current Levels
  6. Discover Financial Stock To Edge Past The Revenue Consensus In Q1

The company’s net revenues grew 22% y-o-y to $11.66 billion in the first nine months of FY 2023. It was mainly driven by a 21% rise in the net interest income coupled with a 24% improvement in the noninterest revenues. Further, total card volume, a key metric, increased by 4% y-o-y over the same period. On the expense side, the provisions figure jumped from $1.48 billion to $4.1 billion, resulting in a 24% y-o-y decline in the adjusted net income to $2.47 billion.

Moving forward, we expect the Q4 results to be on similar lines. Overall, Discover Financial’s revenues are forecast to touch $15.61 billion in FY2023. Additionally, DFS’s adjusted net income margin is likely to drop in the year, leading to an annual EPS of $12.84. This coupled with a P/E multiple of just below 9x will lead to a valuation of $112.

 Returns Dec 2023
MTD [1]
YTD [1]
Total [2]
 DFS Return 20% 14% 55%
 S&P 500 Return 5% 24% 113%
 Trefis Reinforced Value Portfolio 9% 40% 619%

[1] Month-to-date and year-to-date as of 12/27/2023
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates