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1. Company Snapshot

1.a. Company Description

Discover Financial Services, through its subsidiaries, provides digital banking products and services, and payment services in the United States.It operates in two segments, Digital Banking and Payment Services.The Digital Banking segment offers Discover-branded credit cards to individuals; private student loans, personal loans, home loans, and other consumer lending; and direct-to-consumer deposit products comprising savings accounts, certificates of deposit, money market accounts, IRA certificates of deposit, IRA savings accounts and checking accounts, and sweep accounts.


The Payment Services segment operates the PULSE, an automated teller machine, debit, and electronic funds transfer network; and Diners Club International, a payments network that issues Diners Club branded charge cards and/or provides card acceptance services, as well as offers payment transaction processing and settlement services.The company was incorporated in 1960 and is based in Riverwoods, Illinois.

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1.b. Last Insights on DFS

Breaking News: Discover Financial Services is set to be acquired by Capital One Financial Corp in a deal expected to be completed soon pending final closing conditions. This news comes as the company is being replaced in the S&P 500 by Coinbase Global Inc. The acquisition terms were not disclosed.

1.c. Company Highlights

2. Discover Financial Services Posts Strong Q1 2025 Earnings Ahead of Merger with Capital One

Discover Financial Services delivered a robust financial performance in its Q1 2025 earnings, marking its final report before the anticipated merger with Capital One. The company reported net income of $1.1 billion, a 30% year-over-year increase, driven by a strong net interest margin of 12.18%, which expanded by 115 basis points. Earnings per share (EPS) rose 31% to $4.25, surpassing consensus estimates of $3.37, supported by stable customer behavior and improving credit trends. The provision for credit losses declined by $253 million, reflecting lower net charge-offs and a reduced credit reserve balance.

Publication Date: Apr -24

📋 Highlights
  • Merger Approval: Discover's merger with Capital One received regulatory and shareholder approvals, set to close on May 18, 2025, aiming to enhance competition and expand product offerings.
  • Net Income Growth: Net income rose 30% year-over-year to $1.1 billion, driven by a 12.18% net interest margin, a 115-basis-point expansion.
  • Provision Expense Decline: Provision expense decreased $253 million due to lower net charge-offs and a reduced credit reserve balance.
  • Net Charge-Off Rate: Credit performance improved with a 4.99% net charge-off rate, supported by stable customer behavior and improving credit trends.
  • Capital Strength: The common equity Tier 1 ratio rose to 14.7%, reflecting strong capital levels and financial stability.

Operational Highlights

The company maintained stable card receivables, despite a 2% year-over-year decline in card sales, offset by a 10-basis-point increase in payment rates. Personal loan balances remained flat, as cautious underwriting tempered robust demand. Total loans, excluding the student loan sale, grew 1%, while consumer deposits rose 6% year-over-year, with direct-to-consumer deposits comprising 74% of funding. Noninterest income increased 3% to $20 million, bolstered by higher interchange revenue, with a rewards rate of 140 basis points. Operating expenses rose 1%, driven by higher compensation and technology costs, partially offset by a $59 million reduction in other expenses.

Credit Performance and Capital Position

Discover's credit performance remained healthy, with a net charge-off rate of 4.99% and improving delinquency trends. The allowance for credit losses decreased by $215 million, reflecting confidence in portfolio quality. The company's capital position strengthened, with a common equity Tier 1 ratio of 14.7%. Discover also declared a $0.70 per share dividend, though shareholders will transition to Capital One's dividend post-merger.

Valuation Analysis

Trading at a P/E ratio of 11.57 and a price-to-tangible book value (P/TBV) of 2.64, Discover's valuation reflects its strong fundamentals and pending merger synergies. The stock's dividend yield of 1.49% and free cash flow yield of 17.29% highlight its attractive return profile. With a return on equity (ROE) of 24.88% and a net debt-to-EBITDA ratio of 1.79, the company's financial health positions it well for integration with Capital One.

3. NewsRoom

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Capital One Debit-Card Users Aren't All Happy After the Switch to Discover

Nov -14

Source: wsj.com

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Can SE's Rapidly Expanding DFS Unit Sustain Its Revenue Strength?

Nov -13

Source: zacks.com

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Capital One: Strong Quarter And Much Value To Be Extracted From Discover Integration

Oct -23

Source: seekingalpha.com

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Capital One's Discover Deal Lends Scale, Technology, And Billions In Interest Income

Oct -07

Source: seekingalpha.com

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Why the Discover it® Miles Might Be the Best Travel Card With No Annual Fee in 2025

Sep -24

Source: https://www.fool.com

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Discover Financial Freedom Through Debt: PTY

Sep -11

Source: seekingalpha.com

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FDIC Says Capital One-Discover Deal Dented Bank Profits

Aug -26

Source: pymnts.com

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US bank sector sees profit dip due to Capital One-Discover deal: FDIC

Aug -26

Source: reuters.com

4. Business Breakdown

4.a. Revenues by Country

4.b. Revenues by Segment

5. Expected revenues mid-term growth (10.48%)

6. Segments

Digital Banking

Expected Growth: 10.5%

Growing demand for contactless payments, increased mobile penetration and adoption of digital banking solutions drive Discover Financial Services' digital banking segment growth, fueled by its innovative features and user-friendly interface.

Payment Services

Expected Growth: 10.2%

Discover Financial Services' payment services are driven by increasing adoption of digital payments, growth in e-commerce, and expansion into new markets, leading to a forecasted CAGR of 10.2%.

7. Detailed Products

Credit Cards

Discover offers a range of credit cards with cashback rewards, travel benefits, and 0% intro APR promotions.

Banking

Discover offers online banking services, including checking and savings accounts, CDs, and IRA CDs.

Personal Loans

Discover offers unsecured personal loans with fixed rates and fixed monthly payments.

Student Loans

Discover offers private student loans to help students pay for college expenses.

Home Loans

Discover offers mortgage loans, including fixed-rate and adjustable-rate mortgages.

Home Equity Loans

Discover offers home equity loans and lines of credit to help homeowners tap into their home's equity.

8. Discover Financial Services's Porter Forces

Forces Ranking

Threat Of Substitutes

Discover Financial Services operates in a highly competitive industry, and customers have various alternatives for payment methods. However, the company's strong brand recognition and rewards programs help to mitigate the threat of substitutes.

Bargaining Power Of Customers

Discover Financial Services has a large customer base, and customers have significant bargaining power due to the availability of alternative payment methods. The company must continually innovate and offer competitive rewards programs to retain customers.

Bargaining Power Of Suppliers

Discover Financial Services has a diversified supplier base, and suppliers have limited bargaining power. The company's strong financial position and established relationships with suppliers also reduce the bargaining power of suppliers.

Threat Of New Entrants

The financial services industry has significant barriers to entry, including regulatory hurdles and high capital requirements. While new fintech companies are emerging, Discover Financial Services' established brand and scale of operations make it difficult for new entrants to compete.

Intensity Of Rivalry

The financial services industry is highly competitive, with many established players competing for market share. Discover Financial Services faces intense competition from other major credit card companies, banks, and fintech companies, which drives innovation and pricing pressure.

9. SWOT Analysis

Strength

Weaknesses

Opportunities

Threats

10. Capital Structure

10.a. Balance Sheet

10.b. Weighted Average Cost of capital

Value
Debt Weight 58.99%
Debt Cost 5.25%
Equity Weight 41.01%
Equity Cost 11.08%
WACC 7.64%
Leverage 143.86%

11. Quality Control: Discover Financial Services passed 5 out of 9 key points

12.a Historical Valuation

12.b Price/Earnings Ratio

12.c Margin Valuation

12.d Peers Valuation

Peers Group Analysis

Stock-Card
Synchrony

A-Score: 6.9/10

Value: 7.9

Growth: 7.8

Quality: 7.6

Yield: 4.0

Momentum: 7.5

Volatility: 6.7

1-Year Total Return ->

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Stock-Card
Discover

A-Score: 6.8/10

Value: 6.2

Growth: 7.8

Quality: 7.7

Yield: 3.0

Momentum: 8.5

Volatility: 7.7

1-Year Total Return ->

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Stock-Card
Visa

A-Score: 6.1/10

Value: 0.8

Growth: 7.8

Quality: 8.8

Yield: 1.0

Momentum: 8.0

Volatility: 10.0

1-Year Total Return ->

View Full Report
Stock-Card
Capital One

A-Score: 5.9/10

Value: 4.4

Growth: 6.3

Quality: 6.3

Yield: 3.0

Momentum: 8.5

Volatility: 6.7

1-Year Total Return ->

View Full Report
Stock-Card
Amex

A-Score: 5.5/10

Value: 2.4

Growth: 6.6

Quality: 6.9

Yield: 2.0

Momentum: 7.0

Volatility: 8.0

1-Year Total Return ->

View Full Report
Stock-Card
PayPal

A-Score: 4.8/10

Value: 5.1

Growth: 7.7

Quality: 7.3

Yield: 0.0

Momentum: 2.5

Volatility: 6.0

1-Year Total Return ->

View Full Report

Peers Metrics

12.e Scoring Insights

12.f DCF BETA

Parameters

Short Term Growth

Short term Time

Long-Term Growth

WACC

Target Price

200.05$

Current Price

200.05$

Potential

-0.00%

Expected Cash-Flows