Discover Financial Services (NYSE:DFS): What Does The Future Look Like?

As Discover Financial Services (NYSE:DFS) announced its earnings release on 31 December 2018, analyst consensus outlook appear cautiously optimistic, with profits predicted to increase by 2.7% next year relative to the past 5-year average growth rate of -0.3%. Currently with trailing-twelve-month earnings of US$2.7b, we can expect this to reach US$2.8b by 2020. Below is a brief commentary around Discover Financial Services’s earnings outlook going forward, which may give you a sense of market sentiment for the company. Readers that are interested in understanding the company beyond these figures should research its fundamentals here.

View our latest analysis for Discover Financial Services

How is Discover Financial Services going to perform in the near future?

The view from 19 analysts over the next three years is one of negative sentiment. Since forecasting becomes more difficult further into the future, broker analysts generally project out to around three years. I’ve plotted out each year’s earnings expectations and inserted a line of best fit to calculate an annual growth rate from the slope in order to understand the overall trajectory of DFS’s earnings growth over these next few years.

NYSE:DFS Past and Future Earnings, March 7th 2019
NYSE:DFS Past and Future Earnings, March 7th 2019

By 2022, DFS’s earnings should reach US$2.5b, from current levels of US$2.7b, resulting in an annual growth rate of -1.7%. However, if we exclude extraordinary items from earnings, we see that the profits is predicted to rise over time, resulting in an EPS of $8.73 in the final year of forecast compared to the current $7.82 EPS today. The main reason for DFS’s earnings contraction is cost growth exceeding top-line growth of 18% in the next three years. With this high cost growth, margins is expected to contract from 35% to 20% by the end of 2022.

Next Steps:

Future outlook is only one aspect when you’re building an investment case for a stock. For Discover Financial Services, I’ve put together three key aspects you should look at:

  1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Valuation: What is Discover Financial Services worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Discover Financial Services is currently mispriced by the market.
  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Discover Financial Services? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.