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Discover Misses Earnings Estimates but Beats Revenue Estimates

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Part 6
Discover Misses Earnings Estimates but Beats Revenue Estimates PART 6 OF 8

Why Discover Financial Services Has Premium Valuations

Higher valuations

According to Wall Street analysts, Discover Financial Services’ (DFS) stock price is expected to reach $70.00 within one year. The one-year price target given by Wall Street analysts represents a substantial rise of 17.8% from its current trading price. 

Discover Financial reported total loans of $78.0 billion in 2Q17, which reflects an increase of 8% on a year-over-year (or YoY) basis. Discover Financial has a one-year forward price-to-book ratio of ~1.9x, and its peers’ average price-to-book ratio stood at 1.0x, which reflects the company’s premium valuation.

Why Discover Financial Services Has Premium Valuations

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Discover’s peers have the following one-year forward price-to-book ratios:

  • Ally Financial (ALLY): 0.69x
  • PNC Financial Services Group (PNC): ~1.4x
  • Regions Financial (RF): 0.96x

Discover Financial reported credit card loans of $61.5 billion on December 31, 2016, and $61.8 billion on June 30, 2017. The company reported total other loans of ~$13.2 billion on December 31, 2016, and ~$13.9 billion on June 30, 2017.

In 1H17, Discover’s Payment Services division generated pretax income of $80 million and in 1H16, the division reported pretax income of $62 million. This increase was mostly due to a rise in its transaction processing revenues.

Diluted EPS

Discover Financial Services’ (DFS) diluted earnings per share (or EPS) on a trailing-12-month (or TTM) basis stood at $5.80. The diluted EPS of other consumer financial companies (XLF) on a TTM basis follow:

  • PNC Financial Services Group (PNC): $7.86
  • Ally Financial (ALLY): $1.96
  • Regions Financial (RF): $0.96

Let’s look at the analysts’ ratings on Discover Financial Services in the next article of this series.

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