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Earnings Preview: What To Expect From Discover Financial's Full Year FY16 Results

Discover Financial Services ( DFS ) is set to announce earnings for the fourth quarter and full year of fiscal year 2016 on Tuesday, January 24th. The company's two core businesses have had divergent performances so far this year. Discover is different from other payment companies in that its payment network is a closed loop network- i.e., in addition to offering a payment network for processing transactions, it also offers credit to customers. It also offers home equity loans, student loans, personal loans and other loans. Over the first three quarters of fiscal year 2016, its interest income has grown by 8.1% , while its interest expenses have grown by 10.5% resulting in a 7.6% increase in income net of expenses. Excluding provision for loan losses, which increased by 24.6% in 2016, net interest income grew by 3.1%. These figures show that the company is having to take extra precautions in order to rebuild the trust it lost with consumers due to its run ins with regulators.

dfs earning1

In contrast, the company's payments business has declined over the past year, with revenue generated by nearly all streams declining, while expenses have remained just about flat. According to the company, this is largely because they have been disciplined with spending on consumer rewards points, leading them to miss out on transaction volume. This could also partly be the result of a low number of co-branding partnerships and the lower presence of Discover as a payment option in many online transactions. It is for this reason that the company needs to keep pace with the rapidly evolving technologies in the online payment space as well as increase the number of partners it has. We expect the same trends to continue in the fourth quarter, which means that Discover's overall pre-tax income might decline. However, the continuation of an aggressive share buyback program should result in an increase in earnings per share.

dfs earnings2

Have more questions about Discover? See the links below:

  • How Much Did Discover's Revenue & Net Profit Grow In The Last Five Years?
  • How Much Can Discover's Revenue Grow In The Next Five Years?
  • What Is Discover's Fundamental Value Based On Expected 2016 Results?
  • How Has Discover's Revenue Composition Changed In The Last Five Years?

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Discover

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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