Discover the Financial stock (NYSE: DFS) has gained about 7% year-to-date, compared to the S&P500’s 8% decline over the same period. Moreover, at its current price of $123 per share, it is trading 14% below its fair value of $144 – Trefis’ estimate for Discover the valuation of Financial. The credit card giant recently released its fourth quarter results, beating earnings estimates but slightly underperforming revenue consensus. It posted total revenue of $2.94 billion, up 4% year-on-year. This was driven by a 9% year-on-year rise in the digital banking division, thanks to the 4% increase in net interest income (NII) and a 43% jump in discount income and interchange. The NII benefited from some recovery in net interest margin and 2% growth in average outstanding loans. In addition, card purchase volume increased by approximately 25% during the quarter. Both of these factors point to improving levels of consumer spending. Overall, adjusted net income increased 34% year-on-year to $1.06 billion, driving quarterly EPS of $3.64.
The company’s total revenue increased 9% year-over-year to $12.1 billion in 2021. It was driven by a 6% increase in the digital banking unit coupled with a nearly 100% increase payment services business. Notably, the company generates more than 90% of its revenue from the digital banking segment. Payment services benefited from growth in network volumes (+21% y/y) and the number of transactions processed on the network (+17% y/y). Similarly, the digital banking unit derived growth from a 3% rise in NII and a 33% jump in discount and interchange revenue. In total, the above revenue growth translated into a 4x increase in adjusted net income to $5.4 billion. This was primarily due to a favorable reduction in provisions for credit losses from $5.1 billion to $218 million.
Interest rate hikes planned by the Federal Reserve in fiscal 2022 are expected to benefit lenders’ net interest income. In addition, consumer spending levels are expected to improve as economic conditions recover. Globally, Discover the financial income are expected to hit $12.5 billion in fiscal 2022. In addition, DFS’s adjusted net margin, which increased from 10% to 44.3% in 2021, is expected to normalize around 29.9% in course of the year. This will likely translate to adjusted net income of $3.7 billion and annual EPS of $12.92. This, coupled with a P/E multiple just above 11x, will lead to a valuation of $144.
Here you will find our previous coverage of Discover Financial stocks, where you can follow our view over time.
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