Discover Financial stock (NYSE: DFS) has gained approximately 18% YTD, as compared to the 16% rise in the S&P500 over the same period. Further, at its current price of $116 per share, it is trading slightly below its fair value of $118 – Trefis’ estimate for Discover Financial’s valuation. The credit card giant posted mixed results in the first quarter of 2023, with revenues beating the consensus but earnings missing the mark. It reported net revenues of $3.75 billion – up 29% y-o-y. It was driven by a 26% growth in net interest income and a 47% jump in non-interest revenues. While the NII benefited from higher interest rates and an increase in outstanding loan balances, non-interest revenues were up due to improvements in discount and interchange revenues and loan fee income. On the cost front, provisions for credit losses rose from $154 million to $1.1 billion. As a result, the adjusted net income was reduced by 22% y-o-y to $939 million.
The company’s net revenues grew 10% y-o-y to $13.34 billion in FY 2022, mainly due to higher net interest revenues. That said, the top line was somewhat offset by a 9% y-o-y decline in the non-interest income due to a $214 million loss on equity investments. That said, the Discover card purchase volume increased 16% in the year, suggesting improvement in consumer spending levels. On the expense side, the provisions figure witnessed an unfavorable build-up, resulting in a 20% y-o-y decrease in the adjusted net income to $4.3 billion.
Moving forward, we expect the Q2 result to be on similar lines as Q1. Notably, the consensus estimates for Q2 2023 revenues and earnings are $3.88 billion and $3.68 respectively. Overall, Discover Financial’s revenues are forecast to touch $15.56 billion in FY2023. Additionally, DFS’s adjusted net income is expected to remain around $3.44 billion in the year. This coupled with an annual EPS of $13.25 and a P/E multiple of just below 9x will lead to a valuation of $118.
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