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Will Revenue Growth Aid Discover Financial (DFS) Q3 Earnings?

Discover Financial Services'DFS third-quarter earnings are likely to benefit from increase in revenues, driven by growth in receivables, particularly in the card business.

Over time, the company has invested in brand advertising, marketing analytics, superior services and enhancements related to its rewards offerings. Together, these investments continue to drive profitable loan and revenue growth from a balanced mix of new accounts and existing cardholders. The trend is likely to continue in the to-be-reported quarter.

Additionally, the company's Direct Banking business and Payment Services are expected to benefit from a strong U.S. economy.

Factors Influencing Q3 Earnings

Direct Banking Segment: This segment constitutes nearly 95% of the company's earnings. It is expected to see a rise in net interest income driven by a combination of higher loan balances and increased market rates. The personal loans business, however, is likely to be muted in the to-be reported quarter. This is because the company is cutting back on origination activity as it perceives less opportunity for profitable growth in the near term. Management expects personal loans receivables to be flat to down in the second half of this year.

Payment Services: This segment constitutes nearly 5% of the company's earnings. Higher gas prices and increase in customer engagement are anticipated to boost propriety volumes in the Payment Services. Also, the segment is likely to witness a rise in transaction dollar volumes owing to the impact of new issuers on the network as well as solid growth at existing issuers. Backed by consistently strong newer franchise relationships, Diners Club volume is also expected to see an improvement. In addition, Network Partners volume is anticipated to increase driven by AribaPay.

Increase in Operating Expenses: Discover Financial's investments to develop new capabilities and drive growth are likely to result in higher operating expenses. Also, employee compensation and benefits are anticipated to increase, courtesy of rise in technology usage and volume-related headcount to support business growth as well as higher average salaries. Investment in account acquisition and increased brand advertising are expected to result in higher marketing expenses. Information processing cost is also likely to rise owing to investments in infrastructure and analytic capabilities.

Disciplined Capital Management: The company's focus on efficiently deploying its shareholders' capital by driving profitable and disciplined asset growth, and returning excess capital via dividends and share repurchases is anticipated to drive overall results.

Earnings Surprise History

Discover Financial has an impressive earnings surprise history, having surpassed estimates in the trailing four quarters, with an average positive surprise of 2.28%. This is depicted in the chart below:

Discover Financial Services Price and EPS Surprise

Discover Financial Services Price and EPS Surprise | Discover Financial Services Quote

Why a Positive Surprise Likely?

Our proven model indicates that chances of Discover Financial beating the Zacks Consensus Estimate are high as it has the right combination of the two key ingredients - a positive Earnings ESP and a Zacks Rank #3 (Hold) or better. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Earnings ESP: Discover Financial has an Earnings ESP of +0.23%.

Zacks Rank: Discover Financial currently has a Zacks Rank #2 (Buy), which increases the predictive power of ESP.

Other Stocks That Warrant a Look

Here are some companies that you may consider as our model shows that these too have the right combination of elements to post an earnings beat this quarter:

WEX Inc. WEX has an Earnings ESP of +0.49% and a Zacks Rank #2. The company is expected to report third-quarter earnings on Oct 31.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Cardtronics PLC CATM has an Earnings ESP of +3.20% and a Zacks Rank #1. The company is expected to report third-quarter earnings on Nov 1.

EVO Payments, Inc. EVOP has an Earnings ESP of +2.33% and a Zacks Rank #3. The company is expected to report third-quarter earnings on Nov 7.

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Discover Financial Services (DFS): Free Stock Analysis Report

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EVO Payments, Inc. (EVOP): 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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