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Discovery Financial (DFS) Tops Q1 Earnings, Stock Gains

Discover Financial ServicesDFS first-quarter 2016 earnings of $1.35 beat the Zacks Consensus Estimate of $1.30 by 3.9%. The bottom line also improved 5.5% year on year.

As a result, the company stock price increased by 2.02% to $53.61 in after-hours trading. We wait to see how the share price reacts in trading hours.

The company’s revenues, net of interest expenses, grew 2.4% year on year to $2.2 billion. The top line also surpassed Zacks Consensus Estimate of $1.8 billion by 26.%.

Net interest income improved almost 7.4% year over year to $1.8 billion due to loan growth.

Total other expenses increased by 1.5% to $886 million, primarily due to higher employee compensation and benefits and professional fees.

Segment Update    

Direct Banking Segment

This segment’s pre-tax income increased by $1 million from year-ago quarter to $882 million. However, the upside was limited as higher net interest income was offset by lower other income, increased provision for loan losses and higher expenses.

Total loans increased 4% year over year to $70.3 billion; Personal loans grew 9% year over year to $469 million and Credit card loans rose 4% year over year to $55.6 billion.

Private Student loans increased 3% year over year to $772 million. Excluding purchased student loans, however, Private Student loans grew 15%.

Other income decreased 13% year on year due to lack of mortgage origination revenues and decline in protection products revenues by $10 million.

Credit card loans increased 4% year over year to $55.6 billion, while card sales volume grew 4% from the previous year.

Expenses increased 3% on higher regulatory and compliance costs. Discover Financial’s credit card net charge-off rate decreased 6 basis points (bps) year over year to 2.34%. The over-30 days delinquency rate increased to 1.68%, up 4 bps year on year.

Additionally, provisions for loan losses increased $35 million year over year to $423 million as a result of larger reserve build which was $23 million higher year over year at $51 million due to loan growth.

Payment Services Segment    

Pre-tax income at Discover Financial’s Payment Services segment increased to $32 million from $27 million in the year-ago quarter.

Payment Services transaction dollar volume fell 10% from the year-ago quarter to $45 billion. The transaction dollar volume from PULSE plunged 15% year over year due to loss of some volume from a large debit issuer. Within Payment Services, Network Partners’ volume increased 21% year over year, largely due to AribaPay volume.

Financial Position

Discover Financial had total assets worth $88.09 billion as of Mar 31, 2016 against $84.04 billion as of Mar 31, 2015. Total equity was $11.3 billion at the end of Mar 31, 2016 compared with $11.2 billion at the end of Mar 31, 2015. Return on equity was 21% in the first quarter.

Share Repurchase Update

During the reported quarter, Discover Financial bought back 9 million shares for $422 million. This was part of the company’s $2.2 billion buyback program approved on Apr 16, 2015. This led to a 1.8% sequential decline in shares outstanding from the prior-year quarter.

Zacks Rank and Stocks to Consider

Discover Financial currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the same space are Credit Acceptance CACC, First Cash Financial Services FCFS, Cash American International CSH. Each of these stocks carries a Zacks Rank #2 (Buy).

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DISCOVER FIN SV (DFS): Free Stock Analysis Report
CREDIT ACCEPT (CACC): Free Stock Analysis Report
CASH AM INTL (CSH): Free Stock Analysis Report
FIRST CASH FINL (FCFS): Free Stock Analysis Report
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