Discover Financial Services $DFS- Undervalued beast stock.

Introduction of the company: Discover Financial Services (DFS), through its subsidiaries, operates as a digital banking and payment services company in the United States. It operates in two segments, Digital Banking, and Payment Services. The Digital Banking segment offers Discover-branded credit cards to individuals; and other consumer products and services, including private student loans, personal loans, home loans, and other consumer lendings, as well as deposit products, such as certificates of deposit, money market accounts, IRA certificates of deposit, IRA savings accounts, checking accounts, and sweep accounts. The Payment Services segment operates the PULSE network, an automated teller machine, debit, and electronic funds transfer network; Diners Club International, a payments network that issues Diners Club branded charge cards and/or provides card acceptance services; and Diners Club International – Discover Financial’s global payment network. The company was incorporated in 1960 and is based in Riverwoods, Illinois, USA. Earnings and Revenue history In 2020, The Digital Banking segment of the company accounted for 88.3% of pretax income, and the Payment Services segment accounted for the rest of the 11.7%. The company grew its revenue by 21% from 2017 to 2021-TTM (Trailing Twelve Months). The main reason behind the slow revenue growth was covid-19. When the pandemic hit in early-2020, initially for a few months, people started spending less money due to the fear of recession. This caused a direct impact on credit card/ finance institutions including DFS.  But due to the Government support and fast vaccination roll out people started feeling confident again and the company regained its revenue to the pre-covid level in 2021 as consumer started spending normally. From 2017 to 2021 company concentrated on increasing net income. Though, during Covid-19 the net income dropped dramatically from $9.09 EPS in 2019 to $3.6 EPS in 2020. Management executed smartly post-pandemic to increase the net income. The net income grew from $2.031B in 2017 to $5.084B in 2021(TTM) which represents a 150% increase in net income under just 4 years. The EPS (Earnings per share) increased from $5.42 in 2017 to $16.72 in TTM. This represents a more than 200% increase in the EPS in less than 4 years. Discover is buying back stocks heavily- it had 374M shares outstanding in 2017 which reduced to 298M in the recent quarter. This is the main reason why the company’s EPS growth outpaces the net income growth. Apart from the Share buyback program DFS also provides a $0.5/share dividend per quarter or $2/share dividend per year. This is solid proof of the DFS management team firing on all cylinders. Comparison with Peers Right now, the company is trading at $116/share with TTM EPS of $16.72/share. This makes the TTM P/E ratio around 7 which is cheap considering the company’s EPS growth in the past 4 years. Here is the comparison of Discover (DFS) with its peers American Express (AXP), Visa(V), Master Card (MA), and Capital One (COF): From the table, it is clear that at the current share price DFS provides the best value proposition. It offers one of the highest dividend yields in the sector with the highest earnings growth potential in the next 5 years and a relatively cheaper valuation. Valuation and future upside The company is expected to make 17.55 in EPS this year and 13.41 in EPS next year. I believe the company would easily beat the EPS estimation next year as it has a history of beating EPS in the past. Here, we can see how the company has a history of beating the analyst expectations. Sometimes the company beats the expectations by as much as 78%.  Source- Yahoo Finance The company is expected to grow 55% per year for the next 5 years. If we take conservative guidance say the company can grow its earnings by just 20% after 2022, then by 2026 the company would be making at least $27 in EPS. If we assume 9 P/E on the stock, then that would make the share price $243/share by 2026. That is a 109% upside from the current share price in 5 years, or on an average 16% return per year. Note- All the numbers and ratios are taken from Yahoo Finance. This is not financial advice. It is just a personal opinion so please do your own research before making an investment decision.

back

Discover Financial Services $DFS- Undervalued beast stock.

bullish

Introduction of the company:

Discover Financial Services (DFS), through its subsidiaries, operates as a digital banking and payment services company in the United States. It operates in two segments, Digital Banking, and Payment Services. The Digital Banking segment offers Discover-branded credit cards to individuals; and other consumer products and services, including private student loans, personal loans, home loans, and other consumer lendings, as well as deposit products, such as certificates of deposit, money market accounts, IRA certificates of deposit, IRA savings accounts, checking accounts, and sweep accounts. The Payment Services segment operates the PULSE network, an automated teller machine, debit, and electronic funds transfer network; Diners Club International, a payments network that issues Diners Club branded charge cards and/or provides card acceptance services; and Diners Club International - Discover Financial's global payment network. The company was incorporated in 1960 and is based in Riverwoods, Illinois, USA.

Earnings and Revenue history

In 2020, The Digital Banking segment of the company accounted for 88.3% of pretax income, and the Payment Services segment accounted for the rest of the 11.7%.

The company grew its revenue by 21% from 2017 to 2021-TTM (Trailing Twelve Months). The main reason behind the slow revenue growth was covid-19. When the pandemic hit in early-2020, initially for a few months, people started spending less money due to the fear of recession. This caused a direct impact on credit card/ finance institutions including DFS. But due to the Government support and fast vaccination roll out people started feeling confident again and the company regained its revenue to the pre-covid level in 2021 as consumer started spending normally.

From 2017 to 2021 company concentrated on increasing net income. Though, during Covid-19 the net income dropped dramatically from $9.09 EPS in 2019 to $3.6 EPS in 2020. Management executed smartly post-pandemic to increase the net income. The net income grew from $2.031B in 2017 to $5.084B in 2021(TTM) which represents a 150% increase in net income under just 4 years. The EPS (Earnings per share) increased from $5.42 in 2017 to $16.72 in TTM. This represents a more than 200% increase in the EPS in less than 4 years. Discover is buying back stocks heavily- it had 374M shares outstanding in 2017 which reduced to 298M in the recent quarter. This is the main reason why the company's EPS growth outpaces the net income growth. Apart from the Share buyback program DFS also provides a $0.5/share dividend per quarter or $2/share dividend per year. This is solid proof of the DFS management team firing on all cylinders.

Comparison with Peers

Right now, the company is trading at $116/share with TTM EPS of $16.72/share. This makes the TTM P/E ratio around 7 which is cheap considering the company's EPS growth in the past 4 years. Here is the comparison of Discover (DFS) with its peers American Express (AXP), Visa(V), Master Card (MA), and Capital One (COF):

From the table, it is clear that at the current share price DFS provides the best value proposition. It offers one of the highest dividend yields in the sector with the highest earnings growth potential in the next 5 years and a relatively cheaper valuation.

Valuation and future upside

The company is expected to make 17.55 in EPS this year and 13.41 in EPS next year. I believe the company would easily beat the EPS estimation next year as it has a history of beating EPS in the past. Here, we can see how the company has a history of beating the analyst expectations. Sometimes the company beats the expectations by as much as 78%.

Source- Yahoo Finance

The company is expected to grow 55% per year for the next 5 years. If we take conservative guidance say the company can grow its earnings by just 20% after 2022, then by 2026 the company would be making at least $27 in EPS. If we assume 9 P/E on the stock, then that would make the share price $243/share by 2026. That is a 109% upside from the current share price in 5 years, or on an average 16% return per year.

Note- All the numbers and ratios are taken from Yahoo Finance.

This is not financial advice. It is just a personal opinion so please do your own research before making an investment decision.

read-time
4 min
243.00
Target Price
8/ 10
Confidence
3+ Years
Timeframe
catalyst icon
Earnings Per Share
catalyst icon
Financials
catalyst icon
Management
catalyst icon
Price to Earnings Ratio
catalyst icon
Dividend
catalyst icon
Other Catalyst

Access the latest tools and discussion channels with an account

reddit-sentiment

Reddit Sentiment
Analysis

portfolio-balancer

Portfolio Balancer
with brokerages

sec-dashboard

SEC Dashboard
with NLP

*/}aiodd-ad
next