Will Discover Financial (DFS) Stock Rally Post Q4 Earnings?

We expect Discover Financial ServicesDFS to beat earnings expectations when it reports its fourth-quarter and full-year 2016 results, after the market closes tomorrow.

Over the past three months, shares of Discover Financial gained more than 25%. The price reaction was largely driven by the post-election rally over optimism for faster growth in economy as well as potential benefit from tax cut and the Fed rate hike in Dec 2016.

Will the rally in stock price continue post fourth-quarter earnings release? It majorly depends on whether the firm is able to maintain its trend of beating earnings over the last three quarters.

Why a Likely Positive Surprise?

Our proven model shows that Discover Financial has the right combination of two key ingredients to beat earnings.

Positive Zacks ESP : Earnings ESP , which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +0.73%. This is a major indicator of a likely positive earnings surprise for the company.

You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank : Discover Financial carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) and 3 have a significantly higher chance of beating earnings.

The combination of Discover Financial's Zacks Rank #3 and ESP of +0.73% makes us confident of an earnings beat on Jan 24. Notably, the Zacks Consensus Estimate of $1.38 reflects a year-over-year increase of 21.2%.

What to Expect?

The company's quarterly results should benefit from growing loans. It's continued focus on pursuing new card accounts and wallet share gains from existing customers, through investments in marketing and rewards as well as new card features should contribute to card business revenues.

Apart from the credit card loans, its portfolio also consists of personal loans and private student loans. Given the company's efforts on product enhancements and marketing, management remains confidents to witness record originations in student and personal loans for 2016. Total loan growth is expected to be in the range of 4-6% for 2016.

Diners Club volume is also expected to have seen strong growth in the Asia Pacific region.

However, results may reflect impact from higher credit card rewards rate and increased credit loss reserve.

Net interest margin is likely to be relatively flat. Though the company is modestly asset sensitive, the December rate hike is not expected to exhibit material impact on margin.

Regarding expenses, the company is likely to have witnessed a rise in expenses due to several marketing and business development initiatives undertaken during the fourth quarter.

Stocks That Warrant a Look

Here are some stocks worth considering, as they have the right combination of elements to post an earnings beat this quarter.

Nasdaq, Inc. NDAQ is scheduled to release results on Jan 31. It has an Earnings ESP of +1.06% and carries a Zacks Rank #3.

CME Group Inc. CME is slated to release results on Feb 2. It has an Earnings ESP of +1.85% and carries a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .

CBOE Holdings, Inc. CBOE has an Earnings ESP of +3.45% and sports a Zacks Rank #1. The company is slated to release results on Feb 6.

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Discover Financial Services (DFS): Free Stock Analysis Report

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CBOE Holdings Inc. (CBOE): Free Stock Analysis Report

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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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