Can Card Sales Drive Discover Financial's (DFS) Q3 Earnings?

Discover Financial Services (NYSE:DFS) will release third-quarter 2017 results on Oct 24, after market close.

The company is one of the major credit card issuers in the United States. It is creating an active card member base than solely relying on fund transfers at acquisitions, thus protecting the loan portfolio during times of lower balance transfers. Its Direct Banking business is a major revenue growth driver. Continuous growth in card sales and loans strengthen this segment. The company has been witnessing solid increase in card sales volume over past many years, benefitting its revenue base. The Zacks Consensus Estimates for total credit card volume and card sales are pegged at $35 billion and $32 billion, respectively, each reflecting year-over-year growth of 4%.

However, the company’s Payments Service segment has been a drag over the past few years. Three pillars of this segment, Discover Network, Diners’ Club and Pulse Network has been continuously underperforming over past many years. This segment is likely to affect Discover Financial’s results in the third quarter as well. The Zacks Consensus Estimate for its total transaction volume is pegged at $46.8 billion, reflecting a sequential decline of 6.6%.

The company has been taking steps to manage its debt level. The third-quarter margin is hence expected to be less drained by the cost of borrowings. The Zacks Consensus Estimate for the Risk-based Capital ratio is pegged at 0.14 compared with 15.20 in the last quarter.

Other Factors

Discover Financial’s solid loan growth is also expected to be another contributor to top-line appreciation.

The company’s frequently undertaken share repurchase programs, aimed at enhancing shareholders’ value, is expected to impact the bottom line positively by reducing the outstanding share count.

Nevertheless, Discover Financial’s extensively undertaken promotional activities are likely to cause an increase in total expenses, thus impacting the bottom line.

In addition, rising level of debt is likely to result in an increase in interest expenses in the third quarter, limiting the margin.

Earnings Whispers

Our proven model does not conclusively show that Discover Financial is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Discover Financial has an Earnings ESP of -0.29%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Discover Financial Services Price and EPS Surprise

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

Zacks Rank: Discover Financial carries a Zacks Rank #3. Though a favorable Zacks Rank increases the predictive power of ESP, we need a positive Earnings ESP to be confident about an earnings beat.

Conversely, we caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some other companies from the Finance sector that you may want toconsider as these have the right combination of elements to post an earnings beat this quarter:

Aflac Inc. (NYSE:AFL) , which is set to report third-quarter earnings on Oct 25, has an Earnings ESP of +1.31% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here

CNO Financial Group, Inc. (NYSE:CNO) has an Earnings ESP of +1.70% and a Zacks Rank #3. The company is also set to report third-quarter earnings on Oct 25.

Reinsurance Group of America, Incorporated (NYSE:RGA) has an Earnings ESP of +0.32% and a Zacks Rank #2. The company is set to report third-quarter earnings on Oct 26.

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