Shares of Discover Financial Services (DFS) plunged on Friday after the company reported quarterly results. While the company's earnings per share beat the consensus by a penny, its revenue was essentially in line with estimates. Evercore ISI downgraded the stock following the report, saying it sees pressure on Discover’s bottom line this year from higher investments, increased credit costs, and fewer buybacks.
EARNINGS: On Thursday after the market close, Discover reported fourth quarter earnings per share of $2.25, beating analysts' consensus of $2.24 by a penny. Revenue of $2.94B was essentially in line with analysts' $2.95B consensus.
The financial services provider said net interest margin of 10.29% was down 6 basis points from last year, while card yield was 13.08%, a decrease of 12 basis points from the prior year "primarily driven by prime rate decreases and higher interest charge-offs partially offset by favorable portfolio mix." Interest expense as a percent of total loans decreased 11 basis points from the prior year, "primarily as a result of lower market rates," the company said. During Q4, the company said it repurchased approximately 4.9M shares of common stock for $401M.
In a statement, Discover President and CEO Roger Hochschild said that Discover's differentiated business model, product set and intense focus on execution "enable us to continue delivering industry-leading returns." He added that "we are making carefully targeted investments in marketing, analytics and technology that contributed to our strong returns in 2019 and provide a solid platform for another year of profitable growth in 2020."
EVERCORE, PIPER DOWNGRADES: Evercore ISI analyst John Pancari downgraded Discover to Underperform, a Sell-equivalent rating, from In Line with a $75 price target, down from $85, following the company's Q4 report. The company's earnings are likely to be pressured by higher investments, higher credit costs and lower buybacks in 2020, Pancari said in a research note. The analyst also cut his 2020 and 2021 EPS estimates by 7% and 8%, respectively. He noted that Discover shares trade at a premium to peer consumer finance names and said he expects the stock's multiple to compress going forward from here.
Shares were also downgraded to Neutral from Overweight by Piper Sandler analyst Kevin Barker, who lowered his price target to $86 from $96 after taking over coverage of the name. The analyst told investors in a research note of his own that he expects Discover's profit margins to erode over the next several quarters as credit costs continue to move higher, loan growth slows and operating expenses grow at an outsized pace due to investment spending. He would be more positive on the stock if he saw some positive credit metrics and expense growth peak, he added.
Meanwhile, Morgan Stanley analyst Betsy Graseck lowered her price target to $94 from $101 and said she expects Discover shares to be down by a mid-to-high single digits percentage on Friday given that her forward EPS estimates are reduced 7%-8% to account for the company's much higher than expected expense guidance for 2020. Discover's management "basically said" that they believe they have been under-investing in their own brand, according to Graseck, who said the timing and size of the company's accelerated investment spending is "certainly a negative EPS surprise to both us and investors alike." That being said, Graseck said she believes Discover's building utilization of the cloud for data, analytics and marketing should drive a quicker feedback loop into revenue growth and expense reductions.
PRICE TARGET: In morning trading, shares of Discover Financial Services fell nearly 10% to $77.46.
Discover
-8.02 (-9.35%)