Up 8% YTD, What To Expect From Discover Financial Stock In Q1?

Discover Financial (NYSE: DFS) is scheduled to report its fiscal Q1 2024 results on Wednesday, April 17, 2023 (after market close). We expect Discover Financial to edge past the consensus estimates of revenues and earnings. The credit card giant posted mixed results in the last quarter, with revenues topping the street expectations but earnings missing the mark. It reported net revenues of $4.2 billion – up 13% y-o-y, primarily driven by a 13% increase in the net interest income (NII) and an 11% rise in the discount & interchange revenues. We expect the same trend to continue in Q1. Our interactive dashboard analysis on Discover Financial’s Earnings Preview has more details. 

Amid the current financial backdrop, DFS stock has shown strong gains of 35% from levels of $90 in early January 2021 to around $120 now, vs. a similar change 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 15% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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 JPM, V, 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?

Our forecast indicates that Discover Financial’s valuation is $130 per share, which is 7% above the current market price of close to $121. 

(1) Revenues expected to marginally beat the estimates

Discover Financial’s revenues grew 19% y-o-y to $15.86 billion in FY 2023.

• The net interest income (NII) contributes around 80% of the top line. It increased 19% y-o-y to $13.1 billion, primarily due to a higher interest rate environment and growth in interest-earning assets. We expect the momentum to continue in the first quarter.
• The noninterest revenues rose by 20% y-o-y in 2023. It was because of growth in loan fees and discount/interchange fees. We expect the noninterest revenues to follow the same trend in Q1.
• Overall, we forecast Discover Financial’s revenues to touch $16.5 billion for the full year 2024.

Trefis estimates Discover Financial’s fiscal Q1 2024 revenues to be around $4.11 billion, slightly above the $4.08 billion consensus estimate. 

(2) EPS to edge past the consensus estimates

Discover Financial Q1 2024 adjusted earnings per share (EPS) is expected to be $2.98 per Trefis analysis, just above the consensus estimate of $2.95. The adjusted net income decreased 33% y-o-y to $2.86 billion in FY2023. It was mainly due to an unfavorable build-up in the provisions for credit losses from $2.4 billion to $6 billion. We expect the same trend to continue in the first quarter. Overall, Discover Financial is likely to report an annual GAAP EPS of $11.21 for the full year 2024. 

(3) The stock price estimate is 7% higher than the current market price

We arrive at Discover Financial’s valuation, using an EPS estimate of around $11.21 and a P/E multiple of just below 12x in fiscal 2024. This translates into a price of $130, which is 7% above the current market price. 

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 

[1] Returns as of 4/16/2024
[2] Cumulative total returns since the end of 2016

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