Sep 24, 2020
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Despite 90% Jump, Discover Financial Stock Can Still Grow

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GLóRIA DE DOURADOS BRAZIL – 2020/06/02: During this photo illustration the Discover Financial Services. [+] SOPA IMAGES/LIGHTROCKET VIA GETTY IMAGES Discover Financial stock (NYSE: DFS) lost almost 68% – dropping from $84 on the end of 2019 to around $27 in late March – then spiked almost 90% to around $51 now. Despite the recent rally the stock remains 40% below the extent seen at the beginning of the year

 

There have been 2 reasons for this: The Covid-19 outbreak and economic slowdown meant that market expectations for 2020 and the near-term consumer demand dropped. As the corporate is heavily dependent on the mastercard segment and other loans business this may result in sizable losses simply by an expected spike in loan default rates

 

The multi-billion-dollar Fed stimulus provided a floor and the stock recovery owes much to that. But this isn t the top of the story for Discover Financial s stock Trefis estimates Discover Financial s valuation to be around $59 per share – about 15% above the current market price – based on an upcoming trigger explained below and one risk factor

 

The trigger is a far better trajectory for Discover Financial s revenues over the second half the year. We expect the corporate to report $11. 1 billion in revenues for 2020 – around 4% below the figure for 2019. Our forecast stems from our belief that the economy is more likely to open up in Q3

 

Consumer spending within the U. S increased by 8. 5% m-o-m in May after which 5. 6% m-o-m in June (July data isn’t out yet). If the craze continues within the coming months it is more likely to result in higher loans and growth in transaction volume – mastercard business contributed around 76% of the corporate s total revenues in FY 2019

 

This in turn would receive advantages the revenue trajectory over the coming months. However net income for the year is predicted to drop to $1. 1 billion – down 62% y-o-y mainly driven by higher provision for credit losses reducing the EPS figure to $3. 63 for FY2020. After that Discover Financial s revenues are expected to enhance to $11

 

4 billion in FY2021 mainly driven by growth in outstanding mastercard loans and better transaction volume. Further the web income margin is probably going to enhance as when compared with the previous year simply by a decline in provisions for credit losses resulting in an EPS of $5. 94 for FY2021

 

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As Election Day Nears Commit To Voting #ForEveryChild Finally how much should the market pay per dollar of Discover Financial s earnings? Well to earn almost $5

 

94 per year from a bank you d ought to deposit around $650 in a savings account today so about 110x the specified earnings. At Discover Financial s current share price of roughly $51 we’re talking a few P/E multiple of slightly below 9x. And we expect a figure in the direction of 10x will be appropriate

 

That said consumer finance is a risky business right now. Growth looks less promising and near-term prospects are below rosy. What s behind that? Discover Financial has a large portfolio of consumer loans – around $91 billion in FY2019 out of which almost $73 billion were in mastercard loans alone. The economic slowdown is more likely to harm the financial health of many purchasers exposing the corporate to potential loan defaults

 

In anticipation of that Discover Financial has increased its provisions for loan losses to around $3. 9 billion by Q2 2020– around 2. 4x of the year-ago period resulting in a significant jump within the total expenses figure for the year. If the economic condition continues to worsen this figure could further increase within the coming months

 

An identical trend is visible across Discover Financial s peer – American Express. Its revenues are more likely to suffer in FY2020 simply by lower consumer spending and its net income margin is more likely to drop simply by a jump in provisions for credit losses in anticipation of loan defaults

 

Further American Express stock currently has a stock price of over $97 but looks slated for an EPS of around $6. 66 in FY2021. What in case you re looking for a more balanced portfolio instead? Here s a top-quality portfolio to outperform the market with over 100% return since 2016 versus 55% for the S&P 500 Produced from companies with strong revenue growth healthy profits a good number of cash and occasional risk

 

It has outperformed the broader market year after year consistently. See all Trefis Price Estimates and Download Trefis Data here What s behind Trefis? See How It s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product R&D and Marketing Teams

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