D.A. Davidson Analyst Preview Discover's Q2 Earnings

Discover Financial Services DFS is scheduled to report its 2Q16 results on July 19, after market close. D.A. Davidson’s Arren Cyganovich maintained a Buy rating on the company, with a price target of $62, and provided an earnings preview.

While the price target is arrived at using a P/E multiple of 10x, Discover’s shares have traded at a weekly average of 10.5x over the past three years, analyst Arren Cyganovich mentioned. The price target already implies that the company’s shares are currently undervalued.

2Q16 Earnings Preview

Cyganovich expects Discover to report adjusted EPS of $1.36, missing the consensus expectation of $1.42. The GAAP estimate is $1.42, versus consensus estimates of between $1.28 and $1.51.

“While not growing at rates as fast as some of its peers, loan growth continues to accelerate at a modest pace, with May credit card loans up 4.2%, which should help push overall loan growth into its target range of 4%-6% (includes student and personal loans). Fundamentals should be generally good with solid credit, loan growth, mitigated by modest NIM contraction and weaker fee income,” the analyst wrote.

Expenses are expected to decline by 1 percent to $921 million, despite increases in employee costs, marketing, and professional fees. The efficiency ratio is estimated to improve from 42.6 percent in the prior year to 41.5 percent. Credit is likely to be solid, with an estimated $31 million reserve build, compared to a $41 million release in 2Q15.