Why Discover Financial Services Stock Rose 12.5% in October

What happened

Shares of Discover Financial Services (NYSE: DFS) rose 12.5% in October, according to data from S&P Global Market Intelligence. The credit card lender rose following a much better-than-feared earnings report that dropped on Oct. 22, in which the company posted surprising year-over-year profit growth.

A 30-something man smiles and holds a credit  card while on his laptop in his living room.

Image source: Getty Images.

So what

Discover's third-quarter results reflected the peculiar backdrop of the coronavirus for credit card lenders. Lower loans and lower net interest income brought revenue down 6%. But thanks to consumers paying down their bills and spending less on travel and leisure activities, credit has actually held up quite well. Discover's provision for credit losses decreased a lot from last quarter, and was even down relative to the year-ago quarter. In addition, Discover cut $102 million in operating expenses, mostly in marketing and professional fees.

The end result was net income that increased by $1 million over the year-ago third quarter, as EPS actually increased 6% thanks to large buybacks taken before the Federal Reserve made large financial institutions halt repurchases earlier this year.

Now what

It was assumed that Discover's credit-card-heavy lending portfolio was risky relative to other prime lenders, since credit cards are unsecured loans. But the peculiar nature of the pandemic has thus far not resulted in meaningful charge-offs, even as Discover and other banks took large credit reserves earlier in the year.

Should the company get through this downturn relatively unscathed by credit losses, it's possible Discover's stock could undergo a re-rating higher following the pandemic. Despite having tripled off its March lows, there could be even more upside over the intermediate term for Discover, especially if credit continues to hold up.

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Billy Duberstein owns shares of Discover Financial Services. His clients may own shares of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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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