Discover's earnings beat Zacks' estimate

The credit card issuer has been generating exceptional sales volume.

By Zacks.com Jun 20, 2012 9:41AM

By Zacks Equity Research

 

Discover Financial Services (DFS) reported second-quarter 2012 earnings per share of $1.00, a penny ahead of the Zacks consensus estimate but lower than $1.09 recorded in the year-ago quarter.


Net income declined 10.5% year-over-year to $537 million from $600 million. Net income allocated to common shareholders also declined to $532 million from $593 million in the year-ago quarter.


The decline in profits resulted from lower reserve releases, which offset revenue growth and higher interest income. Results were also affected by higher expenses and a decline in the pre-tax income from the Direct Banking segment.


Total revenue, net of interest expense, increased 6.3% year-over-year to $1.85 billion. Net interest income also improved 10.2% year-over-year to $1.32 billion. However, total other expenses jumped 18% year-over-year to $749 million.


Direct banking

The direct banking segment reported pre-tax income of $820 million, reflecting a $63 million decrease from the year-ago quarter. Discover card sales volume grew 5% year-over-year to $26.1 billion.


Total loans improved 9% year-over-year to $57.1 billion, boosted by an increase of $1.6 billion in credit card loans, $2.9 billion in private student loans (including purchase of a $2.4 billion loan portfolio in the fourth quarter of 2011) and $703 million in personal loans.


Other income decreased 4% year-over-year, primarily due to lower late fee assessment, protection products revenue as well as transition services revenue in connection with the acquisition of Student Loan Corporation. Additionally, expenses in the segment enhanced 18% year over year based on higher reserves related to litigation.


The credit card net charge-off rate declined 222 basis points (bps) year-over-year and 28 bps from the prior quarter to 2.79%. Moreover, the over-30-days delinquency rate was at an all-time low of 1.91%, having witnessed a substantial 88 bps decrease year-over-year and 31 bps sequentially, reflecting an overall better credit trend since the fourth quarter of 2009.


The provisions for losses surged 32% or $56 million year over year to $232 million, reflecting lower reserve release, which was partly offset by lower charge-offs. Reserve release was $110 million in the reported quarter, as opposed to $401 million in the year-ago quarter.


Payment services

The payment services segment's pre-tax income grew 10% year-over-year to $47 million. Revenue was up $10 million, reflecting an increase in point-of-sale transactions on the Pulse network, which carry a higher margin, and higher third-party issuer volume, partly offset by increased incentives.


Moreover, expenses increased $6 million from the year-ago level. Payment services dollar volume accelerated 12% from the year-ago quarter to $51.4 billion, reflecting higher Pulse and third-party issuer volume.


During the reported quarter, Discover repurchased 13.5 million shares for $447 million under its $2 billion share repurchase program.


Our take

Discover has been generating exceptional card sales volume over the past few quarters, owing to improved consumer spending and credit quality trends. Moreover, operating performance of the payment services segment was impressive, which contributed to the bottom-line growth. Also, the company has a strong inorganic growth policy, which apart from boosting earnings also fosters portfolio diversification.


However, the expenses of Discover have been rising due to higher compensation and benefit expenses, infrastructure development and growth initiatives. Moreover, the company expects its litigation expenses to rise, and has been strengthening its reserves for this reason.


Nevertheless, the remarkable improvement in credit quality makes us optimistic about Discover's future earnings. Additionally, the company's extensive network, sound capital position and cost containment initiatives are expected to accentuate growth over the long term.


Discover competes with other card companies like MasterCard (MA) and Visa (V). Currently, the company caries a Zacks #2 Rank, implying a "buy" rating in the short term.


More from Zacks.com

Note: Registration is required.

Tags: DFSMAV
0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
284
284 rated 2
461
461 rated 3
671
671 rated 4
628
628 rated 5
618
618 rated 6
615
615 rated 7
495
495 rated 8
347
347 rated 9
115
115 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
DYNDYNEGY Inc10
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.