Discover Financial Services (DFS: 24.28 +0.33 +1.38%) reported its third quarter earnings for fiscal year 2010 on 20th September, beating the Zacks Consensus Estimate substantially by 12 cents per share, led by strong net interest income growth and lower loan loss provisions, though partially offset by higher-than-expected interest expenses.
Nonetheless, the investors’ reactions to the better-than-expected results were quite optimistic on Wall Street. This gets reflected in the upward price movement witnessed since the earnings release. The confidence could be justified not only by the fundamental improvement in the credit and profitability metrics but also by the recent agreement to acquire Student Loan Corp. (SLC).
Below we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for the short-term and long-term outlook for the stock.
Earnings Report Review
Earnings Report Review
It’s always encouraging to outperform estimates, particularly when the difference is substantial enough to inject optimism into future. A quick look at the top line reveals extensive growth across segments, including direct banking and payment service volumes, whose pre-tax operating income surged by 81% and 36% year over year, respectively.
While Discover credit card volumes grew by 5% year over year on higher consumer spending and merchant acceptance, loan loss provisions, net charge-offs and delinquency rates improved modestly, reflecting an overall better credit trends. However, this significant growth was partially offset by higher-than-expected expenses that grew 9% year over year, during the reported quarter.
Earnings Estimate Revisions – Overview
Estimates have witnessed modest movement for Discover since the earnings release. This means that analysts have more or less been receptive to this information and expect continued improvement going forward. In fact, this gives quite a valid reason to own a stock that benefits from positive results and provides a scope for rise in the future. The earnings estimate details are deeply delved into below.
Agreement of Estimate Revisions
Given the exceptionally strong fundamentals, analysts are excited not only about the way Discover has weathered the storm of financial downturn, but also about the forthcoming SLC acquisition. Analysts, therefore, agree with the optimistic future outlook for Discover’s earnings. As a result, we see below that out of 15 analysts in the last 30 days, 12 have increased their estimates for 2010, while only one of has lowered, which is overall encouraging. Moreover, looking into 2011, 13 analysts have raised their estimates while just one downward correction has been witnessed. This gives room for ample buoyancy over the intermediate term.
Magnitude of Estimate Revisions
Overall the last 30 days, earnings estimates have shown extraordinary improvement, upping from 76 cents to 93 cents, since the earnings release. However, estimates moved modestly upwards to $174 from $1.60 per share for 2011. This overall looks promising, particularly, when so many other stocks are experiencing a downfall, analysts continue to value Discover’s earnings at a considerable premium.
Discover on Positive Side
Discover has implemented several capital bolstering initiatives, including equity and debt offering, which have supported the company to achieve a strong capital base. Moreover, with the repayment of its $1.2 billion government bailout loan in April 2010, Discover can divert its focus on consumers and businesses, hence achieving financial success. Increased merchant acceptance, improved credit quality and continued growth in direct banking is expected to augment the top- and bottom-line growth going head.
Moreover, the scheduled SLC acquisition has fetched appreciation from the market for the management’s decision to enhance its already strong student loan portfolio, thereby also adding to the competitive strength. While the deal is scheduled to be culminated by the end of 2010, upon certain debt-asset agreements, it is expected to shore up the bottom line from the first year of purchase, carrying an earnings increment of at least $0.09 per share in 2011 itself.
| Analysts' Targets | |
| FBR Capital Markets & Co. | $25 |
| Outperform | |
| Wednesday, March 23, 2011 | |
| Barclays Capital | $28 |
| Overweight | |
| Wednesday, March 23, 2011 | |
| RBC Capital Markets | $23 |
| Sector Perform | |
| Monday, March 21, 2011 | |
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