Discover financial stocks to beat fourth quarter earnings consensus?

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Discover Financial (NYSE: DFS) is expected to report its fourth quarter 2022 results on Wednesday, January 18, 2023 (after market close). We expect Discover Financial to beat consensus estimates of earnings, but earnings will miss the target slightly. The credit card giant posted total revenue of $3.5 billion in the quarter — up 25% year-over-year, driven by growth in net interest income (NII) and noninterest income. In particular, the NII benefited from higher outstanding loan balances and an improvement in the interest rate environment. We expect the same trend to continue in the fourth quarter.

Our forecast indicates that Discover the valuation of Financial is $119 per share, which is 11% higher than the current market price of nearly $107. Our interactive dashboard analysis on Discover Financials Income Preview has more details.

(1) Revenues are expected to remain just below consensus estimates

Discover the earnings of Financial increased 5% yoy to $9.6 billion in the first three quarters of 2022. This was due to a 13% yoy increase in net interest income, partially offset by a 21% decline in noninterest income.

  • The company derives more than 80% of its total revenue from net interest income. It grew 13% yoy in the first three quarters, driven by an improvement in net interest margin and loan growth. We expect the same trend to continue in the fourth quarter.
  • Noninterest income fell 21% yoy to $1.67 billion in the first nine months. This was mainly due to lower unrealized gains on equity investments. That said, discount/settlement fees and loan fees improved over the same period. We expect fourth quarter results to be similar.
  • Overall, we estimate that Discover Financial’s full-year 2022 revenues will remain around $13.2 billion.

Trefis estimates Discover Financial’s fourth quarter 2022 revenues at approximately $3.59 billion, slightly below the consensus estimate of $3.66 billion.

(2) EPS is likely to beat consensus estimates

Discover Financial Adjusted earnings per share (EPS) for the fourth quarter of 2022 are expected to be $3.93 according to Trefis analysis, almost 8% above the consensus estimate of $3.65. Adjusted net income was cut 24% yoy to $3.3 billion in the first nine months of 2022. This was mainly due to an increase in non-interest-bearing expenses and higher loan loss provisions. However, we expect profitability numbers to show some improvement in the fourth quarter. Overall, Discover Financial is likely to report annual GAAP EPS of $15.65 for the full year 2022.

(3) Estimated share price is 11% higher than the current market price

We arrive at Discover the valuation of Financialbased on an earnings per share estimate of approximately $15.65 and a P/E multiple of just under 8x in fiscal 2022. This translates to a price of $119, which is 11% higher than current market price of about $107.

Note: P/E multiples are based on year-end stock price and reported (or expected) adjusted earnings for the full year

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