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[Updated 05/27/2021] Discover the financial update

Having gained more than 300% since the lows of March 23 of last year, to the current price of nearly $ 114 per share, we believe Discover Financial’s stock (NYSE: DFS) is trading above its near-term potential. The credit card giant saw its stock drop from $ 27 to $ 114 from the March 2020 low against the S&P 500 which rose nearly 85% – the stock dominates the broad market with a considerable margin and gained 26% year-to-date. The positive investor outlook for DFS shares could be attributed to better-than-expected results in each of the past three quarters. In addition, the company has reduced its provisions for credit losses in recent quarters, signaling some recovery in the perceived credit quality of its customers. In addition, US financial stocks, in general, experienced strong growth in fiscal 2021, driven by the approval of the stimulus package, a rapid vaccination campaign against Covid-19 and the Fed’s decision. to keep rates close to zero.

In the recently released first quarter of fiscal 2021 results, Discover Financial reported revenue of $ 2.8 billion, down 3% from a year ago. This could be attributed to a 3% year-over-year decline in net interest income, followed by a 5% decline in non-interest income. In particular, the allowance for bad debts decreased to – $ 365 million for the quarter, from $ 1.8 billion for the same period last year. This resulted in a significant improvement in the company’s profitability figures – EPS went from – $ 0.25 to $ 5.04.

Discover Financial’s revenue of $ 11.1 billion in 2020 was slightly lower than the 2019 figure. The company suffered a 4% year-over-year decline in the direct banking division, which contributes around 95% of revenue. total business. This is due to a decrease in outstanding credit card loans, a lower interest rate environment and a drop in the volume of transactions specific to the network. Having said that, we expect outstanding loans and transaction volumes to improve in the current year, as consumer spending levels pick up. However, interest rates are unlikely to quickly return to pre-Covid-19 levels. All in all, we expect Discover Financial’s income to stay around $ 11.4 billion in fiscal 2021, which is 3% more than the 2020 figure. In addition, Discover Financial’s P / E multiple rose from just over 14x in 2017 to almost 25x in 2020. While the company’s P / E is just below 32x now, that leaves some room for downside when the current P / E is compared to levels. seen in recent years – P / E multiple of around 25x at the end of 2020. Our dashboard “What factors caused Discover’s financial stocks to change 49% between the end of 2017 and now? “ provides the key figures that underpin our thinking.

[Updated 03/24/2021] At $ 92, Discover Financial Stock is likely to trade sideways

After a 245% rally from the lows of March 23 of last year, at the current price of $ 92 per share, we believe Discover Financial Stock (NYSE: DFS) is trading around its near-term potential. Discover Financial, a leading U.S. credit card issuer and electronic payment services company, saw its stock drop from $ 27 to $ 92 from the March 2020 low compared to the S&P which hovered around 75% – the stock dominates wider markets by a huge margin and is trading 22% above its pre-Covid-19 peak in February 2020. The credit card giant outperformed estimates of the consensus for revenue and earnings in each of the last two quarters. In addition, it was able to increase its profitability in the fourth quarter through the reduction of provisions for year-over-year credit losses, suggesting some improvement in the loan repayment capacity of its customers. Therefore, the outlook for investors is positive for DFS stocks.

Discover Financial shares have risen above where they were before the February 2020 decline due to the transformation of the coronavirus outbreak into a pandemic. This seems to make it fully valued because, in reality, income is not expected to see a significant increase over last year.

While the company’s total revenue grew by around 12%, from $ 9.9 billion in 2017 to around $ 11.1 billion in 2020, this translated into a 46% drop in net sales. The difference in the growth numbers is mainly due to a jump in operating expenses as a% of revenue from 38.2% in 2017 to 40.8% in 2020, mainly due to higher compensation costs. This reduced the net profit margin from 20.5% to 10% in 2020.

The company experienced steady growth in revenue over the 2017-2020 period and its P / E multiple increased. We believe the stock is trading near its near-term potential and should trade sideways despite recent growth and potential weakness from a recession caused by the Covid outbreak. Our dashboard “What factors caused Discover’s financial stocks to change 20% between the end of 2017 and now? “ has the underlying numbers.

Discover Financial’s P / E multiple has grown from around 14x in fiscal 2017 to nearly 25x in fiscal 2020. Although the company’s P / E is just below 26x now, there isn’t much room for a drop when the current P / E is compared to levels seen in recent years – P / E multiple of around 25x at the end of 2020.

So where is the stock going?

Discover Financial suffered in 2020 from the global economic downturn and the Covid-19 crisis, which reduced levels of consumer spending and increased the risk of default. The company reported total revenue of $ 11.1 billion for the year, down 3% year-on-year. This could be primarily attributed to a 4% year-on-year decline in credit card business, which contributed around 76% of revenue in 2019. This is due to a decrease in outstanding card loans. credit and headwinds on interest rates. In addition, the volume of credit card purchases also fell by 2% during the year due to lower consumer spending. While a recovery in the economy is likely to improve loan stocks and purchasing volume, interest rates are unlikely to quickly return to pre-Covid-19 levels. Overall, Discover Financial’s revenue is unlikely to experience a significant jump in fiscal 2021. That said, DFS experienced a 62% year-on-year decline in adjusted net income in 2020, primarily Due to higher operating expenses and an increase in provisions for credit losses – the company increased its provisions to neutralize the higher risk of default. However, with the expected massive availability of the Covid-19 vaccine and the expected recovery in the economy, the allowance for credit losses is expected to decline favorably in fiscal 2021, increasing DFS profitability. Overall, the Discover Financial stock is likely to trade sideways in the short term.

The actual recovery and its timing depend on the wider containment of the spread of the coronavirus. Our dashboard Trends in Covid-19 cases in the United States provides insight into the spread of the pandemic in the United States and contrasts with trends in Brazil and Russia. Following the stimulus from the Fed – which set a floor on fear – the market was willing to “look through” the current period of weakness and take a longer view. With investors focusing their attention on the 2021 results, valuations become important in finding value. Although market sentiment may be fickle, and evidence of a slight uptick in new cases could scare investors again.

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