Discover Financial stock (NYSE: DFS) has been performing well, gaining 26% year-to-date compared to a 17% rise in the S&P 500. In contrast, its peer Capital One (NYSE: COF) is up 15% YTD. Despite its strong performance, DFS is currently trading 3% above its fair value of $138 according to Trefis’ estimate. The stock has seen significant volatility in recent years, with returns of 28% in 2021, -15% in 2022, and 15% in 2023. However, it underperformed the S&P 500 in 2023, highlighting the challenges of consistently beating the benchmark index.
Discover Financial reported strong second-quarter results in 2024, with net revenues of $4.5 billion, a 17% increase from the year-ago period. This growth was driven by a 45% jump in non-interest revenues and an 11% rise in net interest income. The company also saw a decrease in provisions for credit losses, offset by a 23% rise in operating expenses. Adjusted net income improved 70% year-over-year to $1.5 billion. Overall, the company’s net revenues grew by 19% year-over-year to $15.86 billion in FY 2023, with growth in both net interest income and non-interest revenues.
Looking ahead, Discover Financial is expected to continue its growth trajectory in the third quarter, with revenues forecasted to reach $16.86 billion in FY 2024. The company’s annual GAAP EPS is likely to remain around $11.81 for the year, coupled with a P/E multiple of just under 12x. This is expected to lead to a valuation of $138, in line with Trefis’ estimates. Despite the strong performance and positive outlook, there are concerns about the company facing challenges in the current uncertain macroeconomic environment, with high oil prices and elevated interest rates.
In recent years, it has been difficult for individual stocks to consistently outperform the S&P 500, even for heavyweights in the Financials sector and megacap stars. However, Trefis’ High Quality Portfolio, with a collection of 30 stocks, has outperformed the benchmark index each year over the same period. The HQ Portfolio stocks have provided better returns with less risk compared to the S&P 500, showcasing a more stable performance. With the potential challenges in the macroeconomic environment, investors may be cautious about Discover Financial’s performance in the coming months and whether it can continue to outperform the market.
Overall, Discover Financial stock has shown strong gains in 2024, with solid revenue growth and improved net income. The company’s performance in the second quarter exceeded expectations, with significant increases in both net interest income and non-interest revenues. Despite concerns about the macroeconomic environment, Discover Financial is expected to maintain its growth momentum in the coming quarters, with revenues forecasted to reach $16.86 billion in FY 2024. Investors will be closely monitoring the company’s performance and its ability to continue outperforming the market amidst current challenges.
