Discover Financial Stock Is Attractive At The Current Levels

Discover Financial stock (NYSE: DFS) has lost roughly 4% YTD, as compared to the 3% rise in the S&P500 over the same period. Further, at its current price of $94 per share, it is trading 20% below its fair value of $117 – Trefis’ estimate for Discover Financial’s valuation. The credit card giant posted better-than-expected results in the fourth quarter of 2022, with revenues increasing by 27% y-o-y to $3.7 billion. It was driven by a 24% rise in net interest income (NII) and a 47% jump in noninterest revenues. The noninterest revenues benefited from higher loan fee income, an increase in discount & interchange revenues, and a drop in losses from equity investments from -$138 million to -$6 million. Similarly, the NII was up due to the higher net interest margin and loan growth. Notably, the average loans increased 19% y-o-y to $108 billion. That said, the provisions for credit losses increased from $263 million to $883 million in the quarter. This led to a 3% y-o-y decline in the adjusted net income to $1.03 billion.

The company’s net revenues increased 10% y-o-y to $13.34 billion in FY 2022. It was due to a 16% y-o-y growth in the net interest income, partially offset by a 9% drop in the noninterest revenues. The noninterest revenues mainly suffered due to a drop in gain (losses) on equity investments from $424 million to -$214 million, more than offsetting the growth in loan fee income and discount & interchange revenues. Further, the total Discover card purchase volume improved by 16% y-o-y over the same period. On the cost front, the provisions figure witnessed an unfavorable build-up from $12.1 billion to $13.3 billion. Overall, it resulted in a 20% y-o-y decrease in the adjusted net income to $4.3 billion.

The consensus estimates of Q1 2023 revenues and earnings are $3.7 billion and $3.99 respectively. Altogether, Discover Financial’s revenues are estimated to touch $15.2 billion in FY2023. Additionally, DFS’s adjusted net income is expected to remain around $3.5 billion in the year. This coupled with an annual EPS of $13.56 and a P/E multiple of just below 9x will lead to a valuation of $117.

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[1] Month-to-date and year-to-date as of 3/29/2023
[2] Cumulative total returns since the end of 2016

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