After increasing 210%, Discover Financial Stock should be avoided for now
[Updated 12/8/2020] Discover the financial update
We believe there can be better places for your money than Discover Financial Stock (NYSE: DFS) at present. DFS is currently trading at $ 83 and is 9% ahead of its pre-Covid high in February. In addition, DFS stock is up 210% from the low of $ 27 seen in March 2020, after the multibillion-dollar stimulus package announced by the U.S. government that helped the stock market recover broadly. measure. The stock largely dominates broader markets (the S&P 500 is up around 65% since the March lows) as investors are bullish on growth in consumer demand over the coming months, leading to growth in outstanding credit card loans.
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, incomes of credit cards have been negatively affected due to a drop in consumer demand. While Discover topped consensus estimates in its recently released third quarter results, it reported revenue of $ 2.7 billion, down 6% from the previous year. Notably, it nearly doubled its allowance for credit losses to $ 4.6 billion for the first nine months year-over-year, to address the higher risk of default. However, as the economy normalizes, we expect consumer demand and its clients’ loan repayment capacity to improve in the coming months. Given the strong rally in Discover Financial Services stock since the end of March, we believe the stock has little room for growth in the near future, even after taking into account an expected improvement in demand despite the recent increase in the number of new Covid-19s. cases in the United States Our conclusion is based on our detailed analysis of the Discover Financial’s stock market performance during the current crisis with that of the 2008 recession in an interactive dashboard analysis.
[Updated 10/08/2020] Find out that the financial stock still has room to grow
We believe this Discover Financial’s stock (NYSE: DFS) has strong upside potential of 16% in the near term. DFS is currently trading at $ 64 and it has lost 23% in value since the start of the year. It was trading at a pre-Covid high of $ 74 in February and is currently 14% below that level. In addition, DFS stock is up 144% from the low of $ 26 seen in March 2020, after the multibillion-dollar stimulus package announced by the U.S. government helped stock prices recover in a slump. to some extent. That said, the stock largely dominates the broader markets (the S&P 500 is up 50%) as investors are positive about the growth in consumer demand over the next few months leading to higher volumes. of credit card transactions and loans. Despite a significant improvement in the DFS stock since the end of March, we believe the stock still has room to grow in the near future. Our conclusion is based on our detailed analysis of Discover Financial’s stock market performance during the current crisis with that of the 2008 recession in an interactive dashboard analysis.
Coronavirus crisis 2020
Timeline of the 2020 crisis so far:
- 12/12/2019: Coronavirus cases first reported in China
- 01/31/2020: WHO declares global health emergency.
- 02/19/2020: Signs of effective containment in China and hopes of monetary easing from major central banks help S&P 500 reach record high
- 03/23/2020: S&P 500 34% drop from the peak level seen on February 19, as COVID-19 cases accelerate outside China. It doesn’t help that oil prices collapse in mid-March amid the Saudi-led price war
- Since 03/24/2020: S&P 500 recovers 50% from lows on March 23, as the Fed’s multibillion-dollar stimulus package removes short-term survival anxiety and puts liquidity into the system.
In contrast, here is how DFS and the broader market fared during the 2007/2008 crisis.
Timeline of the 2007-08 crisis
- 10/01/2007: Approximate pre-crisis peak of the S&P 500 index
- 09/01/2008 – 10/01/2008: Accelerated decline in the market corresponding to Lehman’s bankruptcy filing (09/15/08)
- 03/01/2009: Approximate low point of the S&P 500 index
- 01/01/2010: Initial recovery to levels before the accelerated decline (around 01/09/2008)
Learn about financial performance against the S&P 500 during the 2007-08 financial crisis
DFS stock fell from levels of around $ 17 in October 2007 (the pre-crisis peak) to around $ 5 in March 2009 (as markets bottomed out), implying that the stock has lost up to 73% of its value from its approximate pre-crisis level. peak of crisis. This marked a steeper decline than the broader S&P, which fell about 51%.
However, the DFS recovered sharply from the 2008 crisis to reach around $ 12 in early 2010, increasing 159% between March 2009 and January 2010. In comparison, the S&P rebounded by around 48% on the same. period.
Discover the fundamentals of finance in recent years
Discover Financial income grew by 52%, from $ 7.9 billion in 2015 to $ 12 billion in 2019, mainly driven by growth in the credit card industry. In addition, the company’s net profit increased from $ 2.2 billion to $ 2.9 billion, resulting in strong EPS growth from $ 5.14 in 2015 to $ 9.09 in 2019. Additionally, the company’s second-quarter 2020 revenue was lower than the period last year, and the EPS figure for the quarter fell from $ 2.32 in Q2 2019 to – $ 1.20. in Q2 2020 due to a sharp increase in the allowance for credit losses.
Phases of the Covid-19 crisis:
- Beginning to mid-March 2020: Fear of the rapid spread of the coronavirus epidemic is reflected in reality, the number of cases accelerating in the world
- End of March 2020: social distancing measures + confinements
- April 2020: Fed stimulus suppresses short-term survival anxiety
- May-June 2020: Resumption of demand, with the gradual lifting of confinements – no more panic despite a steady increase in the number of cases
- July-October 2020: Poor second quarter results and lukewarm third quarter expectations, but persistence improvement in demand, a decrease in the number of new cases, and advances in vaccine development boost market sentiment
Keeping the trajectory over 2009-10 in mind and due to the improvement in Discover Financial’s share since late March, this suggests a potential rally to around $ 74 (16% up) once conditions hit. economies will begin to show signs of improvement. This marks a full recovery to the $ 74 level that Discover Financial stock was at before the coronavirus outbreak gained momentum globally.
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