It has been about a month since the last earnings report for Discover (DFS). Shares have lost about 0.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Discover due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Discover Financial's Q4 Earnings Beat on Strong Net Interest Margin
Discover Financial reported fourth-quarter 2024 adjusted earnings per share of $5.11, which comfortably beat the Zacks Consensus Estimate of $3.17. Also, the bottom line jumped more than three-fold year over year.
Discover Financial's revenues, net of interest expenses, rose 13.9% year over year to $4.8 billion. The top line also beat the consensus mark by 8.4%.
DFS reported strong fourth-quarter results supported by interest income growth, thanks to personal and credit card loan growth and margin expansion. Rising PULSE volumes and Diners Club volumes also benefited the Payment Services segment. The positives were partially offset by higher expenses.
Interest income of $5 billion increased 2% year over year and matched our model estimate. Interest expense decreased 3% year over year to $1.4 billion and was lower than our model estimate of $1.5 billion. Non-interest income rose 59% year over year to $1.1 billion and beat the Zacks Consensus Estimate by 29.5%.
Total operating expenses of $1.9 billion escalated 4% year over year due to increased employee compensation and benefits expenses, professional fees, information processing & communications costs. The figure was higher than our estimate of $1.88 billion. Moreover, operating efficiency (total operating expenses divided by revenues, net of interest expenses) improved 380 basis points (bps) year over year to 39% in the fourth quarter.
Discover Financial’s net income of $1.3 billion surged more than three-fold year over year.
The segment reported a pretax income of $1.6 billion, which rose nearly four-fold year over year in the fourth quarter. The increase was due to lower provisions for credit losses and growing revenues, net of interest expenses, partly offset by elevated operating expenses. The metric beat the consensus estimate by 54.5%. Provision for credit losses declined 37% year over year to $1.2 billion.
Total loans declined 4% year over year to $120.8 billion. Personal loans grew 7% year over year. Credit card loans improved 1% year over year, while private student loans declined 86% year over year.
Net interest income of $3.63 billion rose 5% year over year, thanks to net interest margin expansion. The figure surpassed our estimate of $3.56 billion. The net interest margin improved 98 bps year over year to 11.96%.
The segment's pretax income was $74 million compared with the prior-year quarter’s income of $54 million. The metric missed the Zacks Consensus Estimate of $76.6 million.
The Payment Services volume of $102.4 billion improved 4% year over year. The PULSE dollar volume rose 7% year over year on improved debit transaction volume. Meanwhile, the Diners Club volume increased 9% year over year, attributable to growth in Asia Pacific and Israel regions. The Network Partners’ volume decreased 30% year over year.
Discover Financial exited the fourth quarter with total assets of $147.6 billion, lower than $151.7 billion at 2023-end. The liquidity portfolio (comprising cash and cash equivalents and other investments, excluding cash-in-process) amounted to $27.3 billion, higher than $23.25 billion at 2023-end.
Borrowings decreased from $21.3 billion at 2023-end to $16.3 billion. Total liabilities of $129.7 billion at the fourth-quarter end were lower than $137.5 billion at 2023-end. Total equity rose from $14.2 billion at 2023-end to $17.9 billion.
Management has currently paused share repurchases through merger closing with Capital One Financial Corporation (COF Quick QuoteCOF - Research Report) . DFS entered into a definitive agreement in February 2024 to merge with Capital One for $35.3 billion, and the integration planning efforts are advancing well. The company declared a quarterly cash dividend of 70 cents per share and expects the dividend to remain at this level.
Management expects loan growth to follow the pre-pandemic trend. The net interest margin is forecasted to be consistent with the fourth quarter level of 11.96%.
DFS’ expense base is not expected to change significantly prior to merger approval.
Net charge-off is beginning to see a downward trend.
In the past month, investors have witnessed an upward trend in fresh estimates.
At this time, Discover has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Discover has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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