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About Discover
America, we have a credit card problem.
But you already knew that.
With a fresh new all-time record of outstanding (in both senses of the word, truly) consumer credit card debt, it has reached a peak of $1.13 trillion (yep, with a “t”) and given the spending habits and characteristics of the younger generations, I don’t see this being a cap at all, just a relative, recent peak.
Not to sound like an over-the-top pessimist, but come on guys, we all sort of know that the worst is yet to come, and that’s me barely scratching the surface.
With the further societal integration of buy now, pay later platforms such as Klarna, Affirm along with other players in the space, not to mention companies such as retailers that have developed and scaled out their own in-house credit card programs being more common than ever, and while I am generally not the biggest fan of these platforms (I think they, to a certain degree, actively reward dangerous consumer spending behavior and when consumers can’t end up fully buying that pair of shoes or that handbag that they shouldn’t be purchasing in the first place, they are left having to still pay for the item as well as the exorbitant interest and/or penalty fees issued by the aforementioned companies), I have no issue in conceding that for a very well established financial services company like Discover, the future seems pretty dang bright, whether I like it or not.
Based in Riverwoods, Illinois, Discover Financial Services is engaged in the businesses of predominantly issuing credit cards as well as offering its customers a host of traditional banking services, such as offering clients generic savings and checking accounts, administering different types of loans (think personal, home equity, student loans, etc..), and with that, like a bank, generates the vast majority of its top-line revenues through interest income generated through its credit card users and the loans it issues (which does make sense given that in essence they are borrowing money today and for that privilege, they should, sensibly, pay a fee for this facility that Discover happens to offer), with a much smaller revenue stream coming from general transaction and/or processing fees, not to lastly mention its payment processing arm, going up against the two age-old giants in the space, Visa and Mastercard.
Since this is a banking company with a payment processing element, I wouldn’t feel entirely comfortable in asserting this firm to be entirely resistant to recessionary pressures, being that when the economy sours, on the net, more consumers are spending less money, however, there is a real business cushion that comes from the fact that (largely, but not entirely) if the economy does happen to take a turn for the worst, in order to sustain their current lifestyles, many have historically opted to imbue themselves into more loans, accumulating more interest and digging themselves into a deeper long-term hole, which, is great business for a company like Discover.
In addition to the previously stated payment processors, it is hardly any sort of secret that Discover also goes up against other banking and loan giants like Bank of America and JPMorgan Chase, and, oh yeah, a company by the name of Capital One, a direct competitor of Discover that is actually in the process of wholly acquiring Discover for a stratospheric sum of $35 billion in an all-stock deal.
Some could argue that an acquisition such as this one could be good for promoting competition, as it could apply more pricing pressure to the Visas and Mastercards of the world, but some could also reasonably argue that further consolidation in the scope of these multi-billion-dollar companies could lead to these combined forces being much too powerful, invariably hurting consumers all across the globe.
Further discussion of the antitrust implications of such a deal are beyond the scope of this article, however, I have a weird little passion for such matters so expect more in-depth articles on mergers and acquisitions moving forward.
I bring up the merger bit primarily due to the fact that if the merger goes as planned and is cemented and fully approved by the relevant regulatory agencies and other involved parties, Discover’s stock would cease to exist and current and near-term prospective shareholders would be subjected to ultimately becoming shareholders of Capital One (being that, again, it is an all-stock deal instead of an all-cash deal), which presents a whole other barrel of monkeys.
All of that to say, this article is only to serve within the confines of the deal not going through or just in the context of Discover Financial Services existing on its own, barring all other merger considerations.
In keeping this stock analysis article more Discover-centric, let’s walk through some of this company’s core financials and discover more about Discover, once again agnostic of the current merger in play, which prospective shareholders absolutely must keep tabs on and must become as informed on as possible.
Discover’s stock financials
A $32.88 billion company, Discover Financial Services boasts a share price of $131.21 and a respective price-to-earnings (P/E) ratio of a seemingly reasonable 15.07 and offers each of its current shareholders an annual dividend of $2.80, all instantly leading me to believe that this company’s shares (NYSE: DFS) are undervalued given the good ole’ fair value benchmark of 20 rule that I’ve outlined countless times in past articles, and an annual dividend of nearly $3 each year is a nice little gift for one’s yearly stock(ing), also inherently implying that Discover is fairly cash flow generative, more than likely due to its sheer size and scale that it has accumulated over the years.
In narrowing in more on the company’s books, Discover’s executive team and board of directors are tasked with taking care of and acting as a fiduciary agent of $151.5 billion in terms of total assets and, on the other side of the balance sheet, just about $136.7 billion in terms of total liabilities, which, while the total asset-to-total liability ratio seems a bit thin, I’ve learned time and time again that this is the very nature of the segments that Discover operates within, as this company has a lot of outstanding debts in the form(s) of loans floating out and about in the financial and broader consumer ethers.
Candidly, I am just glad to find that the company’s total assets outweigh the cumulative amount of its total liabilities, which is likely one of the many reasons Capital One is interested in treating Discover like a good woman and is intent on taking this company off the market.
Onto the condition of the company’s income statement, Discover Financial Services’ annual revenues stemming from and between 2019 and 2023 have been quite consistent and strong, starting out at $9.4 billion in 2019, reporting $9.2 billion in 2020, $9.5 billion in 2021, just below $10.1 billion in 2022, leading up towards its latest reported revenue figure of $13.1 billion, as displayed in 2022, which is yet another bright spot to be found within Discover’s core financials, apparently being able to grow its revenues while already operating off of a sizable base.
I am also glad to find that the firm’s revenues in the COVID-19 era supported my earlier (purely objective, business-centered) thoughts regarding consumers taking out loans and supporting Discover’s revenues during this time period.
Again, I am not a corporatist nor am I anti-human.
Far from both, frankly, however, in the lens of investing alone, this is a good sign for both current and prospective shareholders of Discover.
Regarding the company’s cash flow statement, Discover’s recent total cash from operations have also shown a great deal of promise, ranging between a relative low of $6 billion (2021) and a high of $8.5 billion (2023), which gives me some more tangible reason to be bullish on the company maintaining its dividend and perhaps continue slowly and steadily growing it in the future, but also telling me that this company’s margins are very beefy (sorry, I am a weirdo with words sometimes) and competitive.
Discover’s stock fundamentals
Not to toot my own horn, but Discover Financial Services’ net profit margin, as shown on Charles Schwab’s platform, was essentially what I expected and confirms my educated guess surrounding the company’s strong cash flows, with its net profit margin listed as 13.96%, being widely more beefy (yeah, I did it again, so what?) than some of its most direct competition, three solid examples being Ally Financial, Capital One along with the premier automobile financing company Credit Acceptance Corporation, each respectively having net profit margins in the order of 9.61%, 13.97% and 12.83%, with Discover clearly being well in line and more than cases than one better than the opps, as the kids say nowadays.
Should you buy Discover stock?
This is the last time I will say it; in the context of this stock analysis article, I am writing this as if there is not a multi-billion-dollar merger in the works.
That being said, in the narrow and singular scope of Discover Financial Services, it has a good balance sheet, its shares appear to be undervalued relative to their actual, full and fair intrinsic worth, its revenues have remained more than sturdy, which is impressive especially given the relative turbulence the national economy has experienced in the last handful of years, its cash flows (total cash from operations in particular) the same and its comparable and standalone net profit margin is in excellent shape.
No wonder Capital One is interested in buying this company out.
All things considered, with no acquisition prospects, I feel comfortable offering Discover’s stock (NYSE: DFS) a “buy” rating, and with the actual prospects of a potentially successful buyout, which is still reportedly in play, one must devise their own rating and base it primarily off of whether or not they think the deal will close and upon fully closing, do you want to trade your stake in Discover for one in Capital One, which is what would happen if the deal closed under the current terms.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.
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