Discover Financial (NYSE: DFS) is expected to release its results for the second quarter of fiscal 2021 on Thursday, July 22. We expect Discover Financial to miss consensus estimates for both revenue and profit. While the credit card giant managed to beat consensus estimates last quarter, its revenue declined year over year. This decrease is explained by the decrease in net interest income, followed by some decrease in non-interest income. On the other hand, the company posted strong growth in profitability, thanks to lower provisions for credit losses. We expect the NII to continue to suffer in the second quarter, however, non-interest income should benefit from some recovery in consumer spending levels. In addition, provisions are also expected to decline favorably in the second quarter.
Our forecast indicates that Discover the valuation of Financial is about $ 108 per share, which is 7% less than the current market price of about $ 117. Check out our interactive dashboard analysis at Check out Financial’s pre-earnings: what to expect in Q2? for more details.
(1) Revenue is expected to narrowly miss consensus estimates in Q2
Trefis estimates Discover Financial’s revenue in the second quarter of 2021 at around $ 2.83 billion, slightly lower than the consensus estimate of $ 2.90 billion. The company’s revenue of $ 11.1 billion in 2020 was 3% lower than in 2019, due to a slight decline in the direct banking segment which generates nearly 95% of total revenue. The segment suffered from lower consumer spending and headwinds in interest rates. Additionally, the same trend continued in the first quarter of 2021. That said, we expect levels of consumer spending to improve in the second quarter, benefiting outstanding loan balances and transaction volumes. However, NII will likely suffer in the second trimester as well.
While interest rates are unlikely to immediately return to pre-Covid-19 levels, improving levels of consumer spending will likely drive DFS revenue in 2021. The company is expected to touch 11 , $ 4 billion during the year. Our dashboard on Discover Financial’s income offers more details on the business segments.
2) BPA risks missing consensus estimates
Discover Financial’s adjusted earnings per share in the second quarter of 2021 is expected to be $ 3.45 per Trefis analysis, almost 9% below the consensus estimate of $ 3.75. The company increased its provisions for credit losses in 2020 from $ 3.2 billion to $ 5.1 billion, to address the higher risk of default. It weighed on its adjusted net income, reducing it by 62% year-on-year. That said, DFS has reduced its provisions in recent quarters. Notably, the allowance for credit losses declined to – $ 365 million in the first quarter, from $ 1.8 billion a year ago, improving EPS from – $ 0.25 to $ 5.04. We expect the same trend to continue in the second quarter of fiscal 2021 results.
Going forward, we expect the company’s net profit margin to improve in the current year, due to a favorable decline in provisions. This will lead to EPS of $ 9.51 in fiscal 2021.
(3) Estimate of the share price 7% lower than the current market price
Through our Discover the valuation of Financial, with an EPS estimate of around $ 9.51 and a P / E multiple of just over 11x in fiscal 2021, that translates to a price of $ 108, which is 7% lower than the current market price of about $ 117.
Note: P / E multiples are based on the stock price at the end of the year and reported (or expected) adjusted earnings for the entire year
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