The stock of Discover Financial Services (NYSE:DFS) is set for a significant decline due to increased Q3 loan loss provisions and challenging macroeconomic conditions, as well as corporate governance issues. These factors are contributing to signs of financial stress among consumers, especially those with lower credit scores.
On Thursday, CFO John Greene expressed concern over the deteriorating net worth and savings among lower credit score borrowers during the company's earnings call. Rising costs of essentials are putting pressure on lower-income consumers, leading to worries about bill payments and spending impacts.
In addition to these financial pressures, Discover is also grappling with corporate governance issues. The company recently entered an agreement with the Federal Deposit Insurance Corp to address misclassified credit-card accounts. As part of this agreement, Discover plans to compensate affected merchants.
Adding to these challenges, CEO Roger C. Hochschild has resigned from his position, leaving the company in search of a new CEO. This leadership transition adds another layer of uncertainty for the financial services firm.
William Blair analyst Robert Napoli noted that uncertainty over resuming buybacks is negatively impacting Discover's stock. According to InvestingPro Tips, the management of Discover has been aggressively buying back shares, which is usually a sign of confidence in the company's future prospects. Yet, the current uncertainty seems to be affecting the market's perception of the company. Despite these challenges, Napoli remains confident in the company's prospects despite rapid consumer loan growth.
Looking ahead, Discover projects that charge-offs will peak by the second half of next year. If delinquency rates do not slow down, the company may take incremental provisions. This move would further illustrate the impact of current economic conditions on the financial health of both Discover and its customers.
According to InvestingPro data, Discover has a P/E ratio of 5.85, which indicates that it is trading at a low earnings multiple. This could potentially be an opportunity for investors looking for undervalued stocks. The company's revenue for the last twelve months (LTM2023.Q2) was 10.79B USD, with a gross profit margin of 94.85%. However, the company's 3-month price total return is at a negative 24.02%, reflecting the current challenges the company is facing.
InvestingPro Tips also indicate that Discover has a strong track record of dividend payments, having maintained them for 17 consecutive years. This could be an attractive feature for income-focused investors. The company's dividend yield as of Y2023.D292 was 3.05%, with a dividend growth of 16.67% for the last twelve months.
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