Discover Financial Services (NYSE: $DFS) stock tumbles as much as 11% during early trading on January 18, 2024. The tumble followed the release of weak results in its Q4 2023 earnings report released afterhours on Wednesday, January 17, 2024.
Weak Q4 2023 Results
According to the Q4 earnings presentation, Discover Financial Services had a net income of $388 million with a diluted earnings per share (EPS) of $1.54. That was a 62% decline in net income from last year’s quarter, when it reported $1.025 billion for an EPS of $3.74. The company’s full-year net income was $2.9 billion, or a diluted EPS of $11.26.
Despite the decline in net income, the company experienced a 15% rise in total loans and a 13% increase in total revenue excluding interest expenses. Additionally, it had several notable achievements, including exceeding $100 billion in card receivables. It also announced its decision to exit student lending and appointed a new CEO. Additionally, discover noted that average consumer deposits increased 4% Q/Q and were up 21% Y/Y.
It reported that the 30-day Delinquency Rate was at 3.45% in Q423, an increase from the 2.30% reported in Q422. The total operating expenses increased 19% to $1.78 billion in the quarter.
It provisioned $1.91 billion for credit losses in the fourth quarter, an increase from the $883 million in the previous year. US lenders have upped their provision for credit losses for non-performing loans. The increase has been occasioned by rising interest rates, heightening the risk of mortgage and credit card default.
Segment Performance
Discover Financial Services saw a massive decline in pretax income in the Digital Banking segment. It fell to $458 million, marking an $848m decrease from last year’s quarter.
The Payment Services segment recorded a $54 million pretax income, a $17 million Y/Y increase; the increase in PULSE revenue drove this increase.
Discover Financial Services Outlook
The company expects loan growth to be relatively flat in 2024. It projects a net interest margin of 10.5-10.8%, depending on rate outlook. The company expects a mid-single-digit increase in operating expenses, subject to risk and compliance issues. It also predicts an average net charge-off rate of 4.9-5.3% for the full year.
DFS Stock Performance
DFS stock bottomed out in early October 2023, when the stock was trading at around $80.49. The company, then, experienced a surge in price and appeared set to reclaim the top end of its 2023 range. However, the release of the Q4 earnings report has changed the stock’s trajectory. It is now at $97.99 per share after sliding as much as 11% during Wednesday’s trading session.
DFS Stock Forecast
Despite the disappointing earnings report for the fourth quarter, analysts remain bullish on DFS, giving it a moderate buy rating. They have set a broad target range of $140 to $94 for stock. Their median target is $111.47, a 13.76% upside.
Should You Buy DFS Stock?
Historically, Discover Financial Services has generated high returns on equity due to its high-interest credit card loans. However, it often trades at a low earnings multiple as most traders factor in the perceived risk around unsecured high-interest loans. The recognized risk is heightened with the current high-interest rates and general macroeconomic headwinds.
However, the stock’s earnings multiple is at comparable levels to the financial services sector average. Investors looking to add DFS stock to their portfolio, should closely examine any perceived and existing risk and how it will impact the stock’s performance.
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