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Discover surprises analysts in Q3

Posted Sep 17th 2009 3:00PM by Steven MallasSteven Mallas RSS Feed
Filed under: Earnings reports, American Express (AXP), MasterCard Inc'A' (MA), Visa Inc. (V)

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Discover Financial Services (NYSE: DFS), a credit card company that competes with Visa (NYSE: V), MasterCard (NYSE: MA), and American Express (NYSE: AXP), released earnings for the third quarter on Thursday. The company put analysts to shame by posting a profit instead of a loss according to an article from Reuters.

The projection was for a loss of 12 cents per share. Discover actually made 52 cents per share of profit, once you exclude monies received from an antitrust settlement. Wow, that's what you call being way off the mark! The disparity surprised me, so I went to our very own earnings preview to see what we were reporting for an estimate. Sure enough, it stated the exact same expectation for a loss of 12 cents.

Yet, it must not have been too much of a surprise to the market since shares are up only 2.5% during afternoon trading and as of this writing (to be fair, they were trading higher earlier in the session). Of course, after looking at Discover's chart, one might argue that the market had already been anticipating a substantial beat.

Going back to the Reuters piece, it seems as if things are improving for Discover. Besides the beat, the company reported a charge-off rate below guidance, and expenses were reduced during the quarter. Revenues appear to be doing all right, and according to the actual press release, the net yield on loan receivables went up 95 basis points, a feat driven by higher interest rates on standard balances and lower promotional rates. Keeping promotional rates down is something management should focus on.

Discover appears very attractive from a technical perspective. It's not too far from a 52-week high, and it looks to me like it will be rising from here (for additional discussion about the technical context surrounding this stock, go back to our earnings preview and check out analyst Elizabeth Harrow's thoughts). Fundamentally, I would rather own Visa or MasterCard because of the lower-risk business model employed by those two, as I've previously explained.

Disclosure: I don't own any company mentioned; positions can change without notice.

Tags: American Express, AmericanExpress, AXP, credit cards, CreditCards, DFS, Discover, discover financial services, DiscoverFinancialServices, elizabeth harrow, ElizabethHarrow, featured, MA, mastercard, V, Visa

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Last updated: November 22, 2009: 05:08 AM

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