Discover Financial Stock Is Beating S&P500 In YTD Returns, What To Expect From Q2 Results?

Discover Financial (NYSE: DFS) stock gained 22% YTD, as compared to the 18% rise in the S&P500 index. Notably, Discover Financial’s peer American Express (NYSE: AXP) is up 30% YTD. Overall, DFS is scheduled to report its fiscal Q2 2024 results on Thursday, July 18, 2024. We expect Discover Financial to miss the consensus estimates of revenues and earnings. The credit card giant posted mixed results in the last quarter, with revenues beating the consensus but earnings missing expectations. It reported net revenues of $4.2 billion – up 13% y-o-y, primarily driven by an 11% rise in the net interest income (NII) and a 19% gain in the noninterest revenues. We expect the revenues to follow the same trend in the second quarter. Our interactive dashboard analysis on Discover Financial’s Earnings Preview has more details. 

Amid the current financial backdrop, DFS stock has seen extremely strong gains of 50% from levels of $90 in early January 2021 to around $135 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 Financials’ valuation is $138 per share, which is just above the current market price of $137.

(1) Revenues expected to marginally miss the estimates

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

• The net interest income grew 19% y-o-y in 2023. Further, it increased 11% y-o-y to $3.49 billion in Q1, thanks to a higher interest rate environment and growth in interest-earning assets. We expect the second quarter results to be on similar lines.
• The noninterest revenues were up 20% y-o-y in 2023, and the same momentum continued in Q1. We expect the Q2 results to follow the same path.
• Overall, we forecast Discover Financials’ revenues to touch $16.84 billion in the full-year 2024.

Trefis estimates Discover Financials’ fiscal Q2 2024 revenues to be around $4.16 billion, slightly below the $4.18 billion consensus estimate.

(2) EPS to miss the consensus estimates

Discover Financial Q2 2024 adjusted earnings per share (EPS) is expected to be $3.03 per Trefis analysis, 1% below the consensus estimate of $3.07. The adjusted net income declined 33% y-o-y to $2.86 billion in FY2023. Further, the same trend continued in Q1 2024 – adjusted net income decreased 71% to $274 million. It was due to a 36% increase in the provisions for credit losses and a 67% jump in the total operating expenses. We expect the same trend to continue in the second quarter. Overall, Discover Financial is likely to report an annual GAAP EPS of $11.87 in the full-year 2024.

(3) Stock price estimate is just above the current market price

We arrive at Discover Financial’s valuation, using an EPS estimate of around $11.87 and a P/E multiple of just below 12x in fiscal 2024. This translates into a price of $138, which is marginally 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 7/16/2024
[2] Cumulative total returns since the end of 2016

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