It hasn't been a great afternoon session for Discover Financial Services investors, who have watched their shares sink by -2.6% to a price of $136.54. Some of you might be wondering if it's time to buy the dip. If you are considering this, make sure to check the company's fundamentals first to determine if the shares are fairly valued at today's prices.
Discover Financial Services Is Reasonably Priced:
Discover Financial Services, through its subsidiaries, provides digital banking products and services, and payment services in the United States. The company belongs to the Finance sector, which has an average price to earnings (P/E) ratio of 19.48 and an average price to book (P/B) ratio of 1.85. In contrast, Discover Financial Services has a trailing 12 month P/E ratio of 12.1 and a P/B ratio of 2.28.
When we divide Discover Financial Services's P/E ratio by its expected EPS growth rate of the next five years, we obtain its PEG ratio of -1.46. Since it's negative, the company has negative growth expectations, and most investors will probably avoid the stock unless it has an exceptionally low P/E and P/B ratio.
EPS Trend Sustained Primarily by Reducing the Number of Shares Outstanding:
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|---|
| Revenue (M) | $10,893 | $11,993 | $11,095 | $10,651 | $12,864 | $17,845 |
| Interest Income (M) | $8,754 | $9,463 | $9,230 | $9,517 | $10,999 | $13,099 |
| Operating Margins | 33% | 32% | 13% | 66% | 44% | 21% |
| Net Margins | 25% | 25% | 10% | 51% | 34% | 16% |
| Net Income (M) | $2,742 | $2,957 | $1,125 | $5,422 | $4,374 | $2,940 |
| Depreciation & Amort. (M) | $435 | $436 | $485 | $531 | $561 | $458 |
| Diluted Shares (M) | 345 | 320 | 307 | 300 | 278 | 254 |
| Earnings Per Share | $7.79 | $9.08 | $3.6 | $17.74 | $15.44 | $11.26 |
| EPS Growth | n/a | 16.56% | -60.35% | 392.78% | -12.97% | -27.07% |
| Avg. Price | $65.79 | $71.06 | $55.61 | $108.44 | $108.52 | $136.04 |
| P/E Ratio | 8.42 | 7.82 | 15.45 | 6.11 | 7.02 | 12.07 |
| Free Cash Flow (M) | $4,937 | $5,912 | $5,935 | $5,825 | $6,904 | $8,260 |
| CAPEX (M) | $254 | $284 | $261 | $194 | $236 | $303 |
| EV / EBITDA | 9.24 | 9.86 | 12.93 | 5.69 | 6.72 | 10.39 |
| Total Debt (M) | $27,228 | $25,701 | $21,241 | $18,477 | $20,108 | $20,581 |
| Net Debt / EBITDA | 3.45 | 4.4 | 4.0 | 1.29 | 1.79 | 2.08 |
Discover Financial Services has generally positive cash flows, growing revenues and a flat capital expenditure trend, and reasonable leverage levels. However, the firm has EPS growth achieved by reducing the number of outstanding shares. Finally, we note that Discover Financial Services has decent operating margins with a negative growth trend.
