Discover Financial Services provides digital banking and payment services, mainly in the United States. Its digital banking segment is quite regular, providing loans and credit cards to individuals. On the other hand, the payment services segment comprises ATMs, funds transfers, and settlement services, among other things. The company suffered a disastrous 2020 but still managed to stay profitable and seems to be recovering well, but is shrouded in uncertainty ahead.
When it rains, it pours
Discover was doing quite well before the pandemic, with revenues rising consistently. In FY17, the company reported revenues of around $9.9 billion, and they had gone up to about $11.4 billion by FY19. However, the company’s performance was primarily driven by the rise in revenues, as the net margin did not increase during the time (it fell slightly). As such, COVID-19 was a particularly devastating time for the company.
The vast majority of the company’s revenues come about due to its credit card business. In fact, 76% of the company’s revenue in FY19 was due to its credit cards. Credit card revenues fell sharply during the pandemic, as not only did people stop traveling (which accounted for a lot of the revenue), but they also stopped being extravagant with their finances. Americans, in general, took on less debt during the pandemic. Companies like Discover suffered the worst as a result.
The company tends to generate most of its income in the final two quarters of the year, which means that FY21 could be the most profitable year for the company yet. Source: EquityClock
Fighting back
Q2 FY20 was a particularly devastating quarter for the company, as large credit losses meant that the company reported a $1.2 per share loss. However, the company announced in an earnings call at the end of Q1 that it had plans to cut costs by $400 million in 2020, and it is a strategy that has seemed to work.
Q2 FY20 was the last quarter in which the company reported a loss. While the turnaround can be largely attributed to the recovery of the economy in general, Discover has come through on its promises to reduce costs and streamline its operations.
The company’s net margin was 28.1% in the final quarter of FY20, and business has been booming in FY21 so far. While Americans were initially wary of the financial burden caused by COVID-19, the sentiment has now swung in the opposite direction. Over 40% of Americans have more credit card debt now than they did at the beginning of the pandemic.
While many of these debts are due to financial decisions during the pandemic, a lot of this is simply consumer debt, with people wanting to buy new things in the wake of rising asset prices.
Discovering value
Trying to value Discover is quite difficult right now. The company has performed exceptionally well in FY21, and the earnings per share have crossed $10 by the end of the second quarter. Just to put this into perspective, the company’s EPS for the entirety of FY19 was $9.08.
However, we are unsure if the company can sustain such a performance. For one, the outlook for the economy is not as great as it was at the beginning of FY21. With inflation on the rise, it is possible that the FED could cut interest rates. While it may not happen in 2021, it is inevitable at some point if inflation rates continue to stay high. That would mean people taking on less credit card debt and may even lead to higher defaults.
Still, while the long-term outlook for Discover is uncertain, we cannot argue that the company seems very enticing in the short term. Consensus estimates place the company’s earnings at $16.8 for FY21. The P/E ratio, currently at 8.15, is expected to fall to 7.70 by the end of the year. For FY22, the earnings are expected to fall to $12.5 per share, with the P/E ratio at 10.3.
This makes it challenging to recommend Discover as a long-term investment right now. Although it may be possible for you to time your entry and exit perfectly, we strongly advise against it. Many an investor has thought themselves to be smarter than the market and realized how wrong they were. Although the company has cut costs significantly during the pandemic, it is still massively exposed to its credit card business. As such, considerable deviations in the company’s performance are to be expected in the years ahead.
Opinions are on our own. The information is provided for information only and does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell, or otherwise transact in any investment including any products or services or an invitation, offer or solicitation to engage in any investment activity.
Editors’ Picks
EUR/USD rebounds from multi-week lows, trades above 1.0750

EUR/USD came under heavy bearish pressure and declined to its weakest level in three weeks below 1.0750 on Friday after the stronger-than-expected Nonfarm Payrolls data. Week-end flows, however, helped the pair erase its daily losses.
GBP/USD remains on track to snap three-week winning streak

GBP/USD recovered toward 1.2550 after coming in within a touching distance of 1.2500 in the second half of the day after Nonfarm Payrolls came in at 199,000 for November. Despite the recent rebound, the pair remains on track to snap a three-week winning streak.
Gold retreats below $2,020 as US yields push higher

Gold broke below its daily range and declined toward $2,010 with the immediate reaction to the upbeat US November jobs report. Although XAU/USD managed to recover toward $2,020, rising US Treasury bond yields triggered another leg lower.
Bitcoin price could retrace to $42,000 if US Nonfarm Payroll comes in at 180,000

Bitcoin price just like other assets, is highly impacted by the macro-financial developments. This includes the Nonfarm Payrolls (NFP) report released by the BLS of the United States.
The week ahead – Fed, ECB and Bank of England rate decisions

When the Federal Reserve kept rates unchanged back in November for the second meeting in a row there was still the distinct possibility that the final meeting of 2023 would provide the possibility of one more rate rise to round off the year in line with Fed policymakers dot plot forecasts of 5.6%.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
Discover how to make money in forex is easy if you know how the bankers trade!
5 Forex News Events You Need To Know
In the fast moving world of currency markets, it is extremely important for new traders to know the list of important forex news...
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and...
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.