What led to lower valuations?
Discover Financial Services (DFS) has a price-to-earnings ratio on an NTM (next-12-months) basis of ~8.9x, which highlights its lower valuations. The average price-to-earnings ratio of Discover’s peers is ~14.0x.
A possible reason for Discover’s lower valuations might be the decline in its earnings per share (or EPS) estimates for 1Q18. About a month ago, the expected EPS for 1Q18 was $1.83, which fell to its current estimate of $1.81. However, the company’s higher cash flows resulting from lower taxes might help the company recover from its lower valuations.
Net interest margin could help
Discover Financial could witness favorable momentum in its net interest margin throughout 2018, which could help it recover from its lower valuations. However, the company plans to incur expenses toward its business activities, which could improve its operating capabilities.
The company plans to adopt measures that would help it improve the volumes in its Payment Services segment. This improvement could help its standing in a competitive environment.
Discover Financial plans to make improvements in its Direct Banking segment by launching new features and products. Discover’s price-to-earnings ratio stood at ~11.9x on an LTM (last-12-months) basis. Among its peers (XLF), Global Payments, Synchrony Financial, and American Express posted price-to-earnings ratios of ~54.6x, ~12.9x, and ~15.6x, respectively, on an LTM basis.
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