Discover Financial (NYSE: DFS) the stock was down about 46% between March 8, 2020 and March 24, 2020 (compared to an 18% drop in the S&P 500), and the stock is down nearly 55% since Jan.31 after the WHO declared a global health emergency in light of the spread of the coronavirus (down from an estimated 27% drop in the S&P 500 since then). Learning from the lessons of the 2008 financial crisis, we see that Discover’s shares have gone from levels of around $ 18 in October 2007 (the pre-crisis peak) to levels of just $ 5 in March 2009 (then. as markets have bottomed) – implying that the company’s shares have lost as much at 73% from their approximate pre-crisis peak. This marked a steeper decline than the broader S&P, which fell 51%.
Will Discover Financial shares similarly recover from the spread of the coronavirus?
- We compare the performance of Discover Financial against the S&P 500 in our interactive dashboard analysis, Comparison of the 2007-08 crisis vs. 2020: How was the price of financial stocks discovered relative to the S&P 500?
- In fact, Discover Financial recovered sharply from the 2008 crisis to levels of around $ 13 in early 2010 – increasing 159% between March 2009 and January 2010. By comparison, the S&P 500 rebounded from around $ 48. % over the same period.
Overall, two distinct trends were behind the recent massive sale. First, the growing number of coronavirus cases outside of China is raising concerns about a global economic slowdown. Second, crude oil prices fell more than 20% after Saudi Arabia increased production.
The effect was also evident in the actions of Discover Financial, as people focus almost entirely on the essentials rather than discretionary and leisure spending due to economic uncertainty. This means that they don’t meet up with friends and colleagues for drinks, lunch or dinner, don’t go to the movies, amusement parks, vacation trips, etc. As the credit card giant is heavily dependent on its credit card business (which contributed around 76% of its revenue in 2019), following a global economic collapse and widespread panic, revenues credit cards could be adversely affected due to lower consumer demand and default on payment. We believe Discover’s first and second quarter results will confirm this reality with lower credit card revenues and transaction volume as well as increased loan losses.
If signs of coronavirus containment are unclear by the April first quarter earnings schedule, it is likely that Discover shares (as well as the broader market) will continue to fall when earnings confirm a tangible reality.
What about the weather?
The potential for large gains (in the order of 100 +%) in Discover’s stock, with even a partial recovery from pre-coronavirus crisis levels and its timeline, depends on wider containment of the spread of the coronavirus. Our dashboard forecasting COVID-19 cases in the United States with cross-country analyzes expected recovery times and possible spread.
In addition, our -28% Coronavirus Accident vs. 4 Historic Accidents dashboard builds a complete macro picture. It complements our analyzes of the impact of the coronavirus on a diverse set of Discover Financial’s multinational peers, including Capital One and American Express. The full set of coronavirus impact and timing analyzes can be found here.
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