Discover Financial Services Valuation – March 2019 $DFS

Company Profile (excerpt from Reuters): Discover Financial Services (DFS), incorporated on July 25, 1960, is a direct banking and payment services company. The Company is a bank holding company, as well as a financial holding company. The Company operates through two segments: Direct Banking and Payment Services. It provides direct banking products and services, and payment services through its subsidiaries. It offers its customers credit card loans, private student loans, personal loans, home equity loans and deposit products.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of DFS – March 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $23,591,292,141 Pass
2. Earnings Stability Positive EPS for 10 years prior Pass
3. Dividend Record Dividend Payments for 10 years prior Pass
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 122.38% Pass
5. Moderate PEmg Ratio PEmg < 20 10.13 Pass
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.17 Pass
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Pass
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $7.09
MG Growth Estimate 6.82%
MG Value $156.93
Opinion Undervalued
MG Grade A
MG Value based on 3% Growth $102.80
MG Value based on 0% Growth $60.26
Market Implied Growth Rate 0.82%
Current Price $71.84
% of Intrinsic Value 45.78%

Discover Financial Services qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position . The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $4.87 in 2015 to an estimated $7.09 for 2019. This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.82% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Discover Financial Services revealed the company was trading below its Graham Number of $77.91. The company pays a dividend of $1.5 per share, for a yield of 2.1%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 10.13, which was below the industry average of 31.76, which by some methods of valuation makes it one of the most undervalued stocks in its industry.

Discover Financial Services fares extremely well in the ModernGraham grading system, scoring an A.

Stage 3: Information for Further Research

Graham Number $77.91
PEmg 10.13
PB Ratio 2.17
Dividend Yield 2.09%
TTM Dividend $1.50
Number of Consecutive Years of Dividend Growth 8

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Long-Term Debt & Capital Lease Obligation $27,228,000,000
Total Assets $109,553,000,000
Intangible Assets $416,000,000
Total Liabilities $98,423,000,000
Shares Outstanding (Diluted Average) 336,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $8.45
Dec2018 $7.79
Dec2017 $5.42
Dec2016 $5.77
Dec2015 $5.13
Dec2014 $4.90
Dec2013 $4.96
Nov2012 $4.46
Nov2011 $4.06
Nov2010 $1.22
Nov2009 $2.38
Nov2008 $1.92
Nov2007 $1.23
Nov2006 $1.89
Nov2005 $1.21
Nov2004 $0.00
Nov2003 $1.36

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $7.09
Dec2018 $6.21
Dec2017 $5.36
Dec2016 $5.23
Dec2015 $4.87
Dec2014 $4.47
Dec2013 $3.98
Nov2012 $3.26
Nov2011 $2.49
Nov2010 $1.72
Nov2009 $1.88
Nov2008 $1.51
Nov2007 $1.25
Nov2006 $1.13
Nov2005 $0.68
Nov2004 $0.36
Nov2003 $0.45

Recommended Reading:

Other ModernGraham posts about the company

10 Low PE Stock Picks for the Defensive Investor – June 2018
Discover Financial Services Valuation – May 2018 $DFS
10 Low PE Stock Picks for the Defensive Investor – August 2017
10 Low PE Stock Picks for the Defensive Investor – February 2017
12 Best Stocks for Value Investors This Week – 2/4/17

Other ModernGraham posts about related companies

Mastercard Inc Valuation – January 2019 $MA
Visa Inc Valuation – November 2018 $V
American Express Co Valuation – November 2018 $AXP
Mastercard Inc Valuation – March 2018 $MA
Discover Financial Services Valuation – January 2017 $DFS
Discover Financial Services Valuation – August 2016 $DFS
Mastercard Inc Valuation – July 2016 $MA
Discover Financial Services Valuation – February 2016 $DFS
Mastercard Inc Valuation – January 2016 Update $MA
Discover Financial Services Inc. Valuation – November 2015 Update $DFS

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Discover Financial Services Valuation – May 2018 $DFS

Company Profile (excerpt from Reuters): Discover Financial Services (DFS), incorporated on July 25, 1960, is a direct banking and payment services company. The Company is a bank holding company, as well as a financial holding company. The Company operates through two segments: Direct Banking and Payment Services. It provides direct banking products and services, and payment services through its subsidiaries. It offers its customers credit card loans, private student loans, personal loans, home equity loans and deposit products.

DFS Chart

DFS data by YCharts

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of DFS – May 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $25,500,576,543 Pass
2. Earnings Stability Positive EPS for 10 years prior Pass
3. Dividend Record Dividend Payments for 10 years prior Pass
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 142.69% Pass
5. Moderate PEmg Ratio PEmg < 20 12.20 Pass
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.42 Pass
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Pass
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $6.08
MG Growth Estimate 5.39%
MG Value $117.14
Opinion Undervalued
MG Grade B
MG Value based on 3% Growth $88.11
MG Value based on 0% Growth $51.65
Market Implied Growth Rate 1.85%
Current Price $74.12
% of Intrinsic Value 63.28%

Discover Financial Services qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position . The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $4.47 in 2014 to an estimated $6.08 for 2018. This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.85% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Discover Financial Services revealed the company was trading above its Graham Number of $69.32. The company pays a dividend of $1.3 per share, for a yield of 1.8% Its PEmg (price over earnings per share – ModernGraham) was 12.2, which was below the industry average of 27.85, which by some methods of valuation makes it one of the most undervalued stocks in its industry.

Discover Financial Services performs fairly well in the ModernGraham grading system, scoring a B.

Stage 3: Information for Further Research

Graham Number $69.32
PEmg 12.20
PB Ratio 2.42
Dividend Yield 1.75%
TTM Dividend $1.30
Number of Consecutive Years of Dividend Growth 7

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2018
Long-Term Debt & Capital Lease Obligation $26,244,000,000
Total Assets $101,967,000,000
Intangible Assets $417,000,000
Total Liabilities $91,096,000,000
Shares Outstanding (Diluted Average) 355,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $7.40
Dec2017 $5.42
Dec2016 $5.77
Dec2015 $5.13
Dec2014 $4.90
Dec2013 $4.96
Nov2012 $4.46
Nov2011 $4.06
Nov2010 $1.22
Nov2009 $2.38
Nov2008 $1.92
Nov2007 $1.23
Nov2006 $1.89
Nov2005 $1.21
Nov2004 $0.00
Nov2003 $1.36

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $6.08
Dec2017 $5.36
Dec2016 $5.23
Dec2015 $4.87
Dec2014 $4.47
Dec2013 $3.98
Nov2012 $3.26
Nov2011 $2.49
Nov2010 $1.72
Nov2009 $1.88
Nov2008 $1.51
Nov2007 $1.25
Nov2006 $1.13
Nov2005 $0.68
Nov2004 $0.36
Nov2003 $0.45

Recommended Reading:

Other ModernGraham posts about the company

10 Low PE Stock Picks for the Defensive Investor – August 2017
10 Low PE Stock Picks for the Defensive Investor – February 2017
12 Best Stocks for Value Investors This Week – 2/4/17
10 Low PE Stock Picks for the Defensive Investor – January 2017
Discover Financial Services Valuation – January 2017 $DFS

Other ModernGraham posts about related companies

Mastercard Inc Valuation – March 2018 $MA
Discover Financial Services Valuation – January 2017 $DFS
Discover Financial Services Valuation – August 2016 $DFS
Mastercard Inc Valuation – July 2016 $MA
Discover Financial Services Valuation – February 2016 $DFS
Mastercard Inc Valuation – January 2016 Update $MA
Discover Financial Services Inc. Valuation – November 2015 Update $DFS
MasterCard Inc. Analysis – October 2015 Update $MA
Discover Financial Services Analysis – August 2015 Update $DFS
Mastercard Inc. Analysis – June 2015 Update $MA

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Discover Financial Services Valuation – January 2017 $DFS

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – January 2017.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Discover Financial Services (DFS) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Discover Financial Services (DFS) is a direct banking and payment services company. The Company is a bank holding company, as well as a financial holding company. The Company operates through two segments: Direct Banking, which includes consumer banking and lending products, specifically Discover-branded credit cards issued to individuals and small businesses on the Discover Network and other consumer banking products and services, including personal loans, home equity loans, and other consumer lending and deposit products, and Payment Services segment, which includes PULSE and its Network Partners business. PULSE is an automated teller machine, debit and electronic funds transfer network. The Company’s Network Partners business provides payment transaction processing and settlement services on the Discover Network. The Company provides direct banking products and services, and payment services through its subsidiaries.

DFS Chart

DFS data by YCharts

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To read the details of this valuation, you must be logged in as a premium member. If you are not a premium member, please consider becoming one.

Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of DFS – January 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $27,292,269,532 Pass
2. Earnings Stability Positive EPS for 10 years prior Pass
3. Dividend Record Dividend Payments for 10 years prior Pass
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 203.44% Pass
5. Moderate PEmg Ratio PEmg < 20 12.56 Pass
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.40 Pass
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Pass
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg $5.50
MG Growth Estimate 5.74%
MG Value $109.91
Opinion Undervalued
MG Grade C+
MG Value based on 3% Growth $79.73
MG Value based on 0% Growth $46.74
Market Implied Growth Rate 2.03%
Current Price $69.06
% of Intrinsic Value 62.83%

Discover Financial Services qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position . The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $3.98 in 2013 to an estimated $5.5 for 2017. This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.03% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Discover Financial Services revealed the company was trading above its Graham Number of $62.08. The company pays a dividend of $1.16 per share, for a yield of 1.7% Its PEmg (price over earnings per share – ModernGraham) was 12.56, which was below the industry average of 23.3, which by some methods of valuation makes it one of the most undervalued stocks in its industry.

Discover Financial Services receives an average overall rating in the ModernGraham grading system, scoring a C+.

Stage 3: Information for Further Research

Graham Number $62.08
PEmg 12.56
PB Ratio 2.40
Dividend Yield 1.68%
TTM Dividend $1.16
Number of Consecutive Years of Dividend Growth 7

[/not-level-free]

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2016
Long-Term Debt & Capital Lease Obligation $25,443,000,000
Total Assets $92,308,000,000
Intangible Assets $421,000,000
Total Liabilities $80,985,000,000
Shares Outstanding (Diluted Average) 393,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $5.85
Dec2016 $5.77
Dec2015 $5.13
Dec2014 $4.90
Dec2013 $4.96
Nov2012 $4.46
Nov2011 $4.06
Nov2010 $1.22
Nov2009 $2.38
Nov2008 $1.92
Nov2007 $1.23
Nov2006 $1.89
Nov2005 $1.21
Nov2004 $0.00
Nov2003 $1.36

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $5.50
Dec2016 $5.23
Dec2015 $4.87
Dec2014 $4.47
Dec2013 $3.98
Nov2012 $3.26
Nov2011 $2.49
Nov2010 $1.72
Nov2009 $1.88
Nov2008 $1.51
Nov2007 $1.25
Nov2006 $1.13
Nov2005 $0.68
Nov2004 $0.36
Nov2003 $0.45

Recommended Reading:

Other ModernGraham posts about the company

10 Low PE Stock Picks for the Defensive Investor – August 2016
10 Low PE Stocks for the Defensive Investor – July 2016
10 Low PE Stocks for the Defensive Investor – June 2016
10 Low PE Stocks for the Defensive Investor – May 2016
15 Best Stocks For Value Investors This Week – 2/13/16

Other ModernGraham posts about related companies

Discover Financial Services Valuation – August 2016 $DFS
Mastercard Inc Valuation – July 2016 $MA
Discover Financial Services Valuation – February 2016 $DFS
Mastercard Inc Valuation – January 2016 Update $MA
Discover Financial Services Inc. Valuation – November 2015 Update $DFS
MasterCard Inc. Analysis – October 2015 Update $MA
Discover Financial Services Analysis – August 2015 Update $DFS
Mastercard Inc. Analysis – June 2015 Update $MA
Discover Financial Services Quarterly Valuation – May 2015 $DFS
Mastercard Inc. Quarterly Valuation – March 2015 $MA

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Discover Financial Services Valuation – August 2016 $DFS

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – July 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Discover Financial Services (DFS) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Discover Financial Services (DFS) is a direct banking and payment services company. The Company is a bank holding company, as well as a financial holding company. The Company operates through two segments: Direct Banking, which includes consumer banking and lending products, specifically Discover-branded credit cards issued to individuals and small businesses on the Discover Network and other consumer banking products and services, including personal loans, home equity loans, and other consumer lending and deposit products, and Payment Services segment, which includes PULSE and its Network Partners business. PULSE is an automated teller machine, debit and electronic funds transfer network. The Company’s Network Partners business provides payment transaction processing and settlement services on the Discover Network. The Company provides direct banking products and services, and payment services through its subsidiaries.

DFS Chart

DFS data by YCharts

[level-free]
To read the details of this valuation, you must be logged in as a premium member. If you are not a premium member, please consider becoming one.

Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.

[/level-free]
[not-level-free]

Downloadable PDF version of this valuation:

ModernGraham Valuation of DFS – August 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $23,422,427,852 Pass
2. Earnings Stability Positive EPS for 10 years prior Pass
3. Dividend Record Dividend Payments for 10 years prior Pass
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 182.10% Pass
5. Moderate PEmg Ratio PEmg < 20 11.23 Pass
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.09 Pass
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Pass
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

DFS value chart August 2016

EPSmg $5.16
MG Growth Estimate 8.77%
MG Value $134.43
Opinion Undervalued
MG Grade C+
MG Value based on 3% Growth $74.87
MG Value based on 0% Growth $43.89
Market Implied Growth Rate 1.37%
Current Price $57.99
% of Intrinsic Value 43.14%

Discover Financial Services qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position. The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $3.26 in 2012 to an estimated $5.16 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.37% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Discover Financial Services revealed the company was trading above its Graham Number of $57.8. The company pays a dividend of $1.12 per share, for a yield of 1.9% Its PEmg (price over earnings per share – ModernGraham) was 11.23, which was below the industry average of 20.62, which by some methods of valuation makes it one of the most undervalued stocks in its industry.

Discover Financial Services receives an average overall rating in the ModernGraham grading system, scoring a C+.

Stage 3: Information for Further Research

DFS charts August 2016

Graham Number $57.80
PEmg 11.23
PB Ratio 2.09
Dividend Yield 1.93%
TTM Dividend $1.12
Number of Consecutive Years of Dividend Growth 6

[/not-level-free]

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2016
Long-Term Debt & Capital Lease Obligation $24,681,000,000
Total Assets $87,511,000,000
Intangible Assets $422,000,000
Total Liabilities $76,114,000,000
Shares Outstanding (Diluted Average) 411,000,000

Earnings Per Share History

Next Fiscal Year Estimate $5.57
Dec2015 $5.13
Dec2014 $4.90
Dec2013 $4.96
Nov2012 $4.46
Nov2011 $4.06
Nov2010 $1.22
Nov2009 $2.38
Nov2008 $1.92
Nov2007 $1.23
Nov2006 $1.89
Nov2005 $1.89
Nov2003 $1.36

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $5.16
Dec2015 $4.87
Dec2014 $4.47
Dec2013 $3.98
Nov2012 $3.26
Nov2011 $2.49
Nov2010 $1.72
Nov2009 $1.93
Nov2008 $1.69
Nov2007 $1.47
Nov2006 $1.41
Nov2005 $0.99
Nov2003 $0.45

Recommended Reading:

Other ModernGraham posts about the company

10 Low PE Stock Picks for the Defensive Investor – August 2016
10 Low PE Stocks for the Defensive Investor – July 2016
10 Low PE Stocks for the Defensive Investor – June 2016
10 Low PE Stocks for the Defensive Investor – May 2016
15 Best Stocks For Value Investors This Week – 2/13/16

Other ModernGraham posts about related companies

Mastercard Inc Valuation – July 2016 $MA
Discover Financial Services Valuation – February 2016 $DFS
Mastercard Inc Valuation – January 2016 Update $MA
Mastercard Inc Valuation – January 2016 Update $MA
Discover Financial Services Inc. Valuation – November 2015 Update $DFS
MasterCard Inc. Analysis – October 2015 Update $MA
Discover Financial Services Analysis – August 2015 Update $DFS
Mastercard Inc. Analysis – June 2015 Update $MA
Discover Financial Services Quarterly Valuation – May 2015 $DFS
Mastercard Inc. Quarterly Valuation – March 2015 $MA

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Discover Financial Services Valuation – February 2016 $DFS

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – February 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Discover Financial Services (DFS) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Discover Financial Services (DFS) is a direct banking and payment services company. The Company is a bank holding company, as well as a financial holding company. The Company provides direct banking products and services and payment services through its subsidiaries. The Company manages its business activities in two segments: Direct Banking and Payment Services. Direct Banking segment includes consumer banking and lending products, specifically Discover-branded credit cards issued to individuals and small businesses on the Discover Network and other consumer banking products and services, including private student loans, personal loans, home loans, home equity loans, prepaid cards and other consumer lending and deposit products. The Payment Services segment includes PULSE, Diners Club and the Company’s network partners business, which provides payment transaction processing and settlement services on the Discover Network.

[level-free]

To read the details of this valuation, you must be logged in as a premium member. If you are not a premium member, please consider becoming one.

Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.

[/level-free]
[not-level-free]

Downloadable PDF version of this valuation:

ModernGraham Valuation of DFS

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $19,258,814,230 Pass
2. Earnings Stability Positive EPS for 10 years prior Pass
3. Dividend Record Dividend Payments for 10 years prior Pass
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 172.68% Pass
5. Moderate PEmg Ratio PEmg < 20 9.01 Pass
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.72 Pass
Score
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Pass
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

DFS value chart February 2016

EPSmg $5.01
MG Growth Estimate 8.05%
MG Value $123.20
Opinion Undervalued
MG Value based on 3% Growth $72.61
MG Value based on 0% Growth $42.57
Market Implied Growth Rate 0.25%
Current Price $45.11
% of Intrinsic Value 36.61%

Discover Financial Services qualifies for both the Enterprising Investor and the more conservative Defensive Investor.  In fact, the company passes all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.26 in 2012 to an estimated $5.01 for 2016.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.25% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

Stage 3: Information for Further Research

DFS charts February 2016

Graham Number $56.05
PEmg 9.01
PB Ratio 1.72
Dividend Yield 2.31%
Number of Consecutive Years of Dividend Growth 6

 

[/not-level-free]

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information Dec2015
Long-Term Debt $24,724,000,000
Total Assets $86,936,000,000
Intangible Assets $423,000,000
Total Liabilities $75,661,000,000
Shares Outstanding (Diluted Average) 429,520,000

Earnings Per Share History

Next Fiscal Year Estimate $5.32
Dec2015 $4.86
Dec2014 $4.90
Dec2013 $4.96
Nov2012 $4.46
Nov2011 $4.06
Nov2010 $1.22
Nov2009 $2.38
Nov2008 $1.92
Nov2007 $1.23
Nov2006 $1.89
Nov2005 $1.89
Nov2003 $1.36

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $5.01
Dec2015 $4.78
Dec2014 $4.47
Dec2013 $3.98
Nov2012 $3.26
Nov2011 $2.49
Nov2010 $1.72
Nov2009 $1.93
Nov2008 $1.69
Nov2007 $1.47
Nov2006 $1.41
Nov2005 $0.99
Nov2003 $0.45

Recommended Reading:

Other ModernGraham posts about the company

10 Low PE Stocks for the Enterprising Investor – February 2016
10 Companies Benjamin Graham Would Invest In Today – September 2015
10 Most Undervalued Companies for the Enterprising Investor – August 2015
The 8 Best Stocks For Value Investors This Week – 8/8/15
Discover Financial Services Analysis – August 2015 Update $DFS

Other ModernGraham posts about related companies

Mastercard Inc Valuation – January 2016 Update $MA
Discover Financial Services Inc. Valuation – November 2015 Update $DFS
MasterCard Inc. Analysis – October 2015 Update $MA
Discover Financial Services Analysis – August 2015 Update $DFS
Mastercard Inc. Analysis – June 2015 Update $MA
Discover Financial Services Quarterly Valuation – May 2015 $DFS
Mastercard Inc. Quarterly Valuation – March 2015 $MA
Discover Financial Services Quarterly Valuation – February 2015 $DFS
Mastercard Inc. Quarterly Valuation – December 2014 $MA

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Discover Financial Services Inc. Valuation – November 2015 Update $DFS

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – October 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Discover Financial Services Inc. (DFS) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Discover Financial Services (DFS) is a direct banking and payment services company. The Company is a bank holding company, as well as a financial holding company. The Company provides direct banking products and services and payment services through its subsidiaries. The Company manages its business activities in two segments: Direct Banking and Payment Services. Direct Banking segment includes consumer banking and lending products, specifically Discover-branded credit cards issued to individuals and small businesses on the Discover Network and other consumer banking products and services, including private student loans, personal loans, home loans, home equity loans, prepaid cards and other consumer lending and deposit products. The Payment Services segment includes PULSE, Diners Club and the Company’s network partners business, which provides payment transaction processing and settlement services on the Discover Network.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of DFS – November 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $24,195,581,069 Pass
2. Earnings Stability Positive EPS for 10 years prior Pass
3. Dividend Record Dividend Payments for 10 years prior Fail
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 198.61% Pass
5. Moderate PEmg Ratio PEmg < 20 11.57 Pass
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.17 Pass
Score
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Pass
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

DFS value Chart November 2015

EPSmg $4.89
MG Growth Estimate 14.45%
MG Value $183.04
Opinion Undervalued
MG Value based on 3% Growth $70.96
MG Value based on 0% Growth $41.60
Market Implied Growth Rate 1.53%
Current Price $56.60
% of Intrinsic Value 30.92%

Discover Financial Services Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the short dividend record.  The Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.49 in 2011 to an estimated $4.89 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.53% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Discover Financial Services Inc. (DFS)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

DFS Charts November 2015

Graham Number $53.68
PEmg 11.57
PB Ratio 2.17
Dividend Yield 1.84%
Number of Consecutive Years of Dividend Growth 5

 

[/not-level-free]

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Long-Term Debt $23,800,000,000
Total Assets $85,611,000,000
Intangible Assets $424,000,000
Total Liabilities $74,308,000,000
Shares Outstanding (Diluted Average) 434,000,000

Earnings Per Share History

Next Fiscal Year Estimate $5.19
Dec14 $4.90
Dec13 $4.96
Nov12 $4.46
Nov11 $4.06
Nov10 $1.22
Nov09 $2.38
Nov08 $1.92
Nov07 $1.23
Nov06 $1.89
Nov05 $1.89
Nov03 $1.36

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $4.89
Dec14 $4.47
Dec13 $3.98
Nov12 $3.26
Nov11 $2.49
Nov10 $1.72
Nov09 $1.93
Nov08 $1.69
Nov07 $1.47
Nov06 $1.41
Nov05 $0.99
Nov03 $0.45

Recommended Reading:

Other ModernGraham posts about the company

10 Companies Benjamin Graham Would Invest In Today – September 2015
10 Most Undervalued Companies for the Enterprising Investor – August 2015
The 8 Best Stocks For Value Investors This Week – 8/8/15
Discover Financial Services Analysis – August 2015 Update $DFS
5 Most Undervalued Companies for the Enterprising Investor – July 2015

Other ModernGraham posts about related companies

MasterCard Inc. Analysis – October 2015 Update $MA
Discover Financial Services Analysis – August 2015 Update $DFS
Mastercard Inc. Analysis – June 2015 Update $MA
Discover Financial Services Quarterly Valuation – May 2015 $DFS
Mastercard Inc. Quarterly Valuation – March 2015 $MA
Discover Financial Services Quarterly Valuation – February 2015 $DFS
Mastercard Inc. Quarterly Valuation – December 2014 $MA
Discover Financial Services Quarterly Valuation – November 2014
Mastercard Inc. Quarterly Stock Valuation – September 2014 $MA
Discover Financial Services Quarterly Valuation – August 2014 $DFS

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Discover Financial Services Analysis – August 2015 Update $DFS

Discover_FinancialIn the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid financial company in which to invest, because they require specific achievements over the historical period.  Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn’t be considered when evaluating the company’s prospects, but doing so would involve speculation.  We don’t know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before.  By continuing to require the same standards for the historical period, Intelligent Investors are able to whittle down banks to only those with the best financial position, and then they are able to determine an intrinsic value to get a sense of whether the company is a good investment.  In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Discover Financial Services (DFS) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Discover Financial Services (DFS) is a direct banking and payment services company. The Company is a bank holding company, as well as a financial holding company. The Company provides direct banking products and services and payment services through its subsidiaries. The Company manages its business activities in two segments: Direct Banking and Payment Services. Direct Banking segment includes consumer banking and lending products, specifically Discover-branded credit cards issued to individuals and small businesses on the Discover Network and other consumer banking products and services, including private student loans, personal loans, home loans, home equity loans, prepaid cards and other consumer lending and deposit products. The Payment Services segment includes PULSE, Diners Club and the Company’s network partners business, which provides payment transaction processing and settlement services on the Discover Network.

Defensive Investor – must pass all 6 of the following tests: Score = 5/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  3. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  5. Moderate PEmg ratio – PEmg is less than 20 – PASS
  6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3

  1. Earnings Stability – positive earnings per share for at least 5 years – PASS
  2. Dividend Record – currently pays a dividend – PASS
  3. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $53.62
MG Value $180.80
MG Opinion Undervalued
Value Based on 3% Growth $70.62
Value Based on 0% Growth $41.40
Market Implied Growth Rate 1.25%
PEmg 11.01
PB Ratio 2.10

Balance Sheet – June 2015

Total Debt $24,099,000,000
Total Assets $84,911,000,000
Intangible Assets $425,000,000
Total Liabilities $73,648,000,000
Outstanding Shares 442,000,000

Earnings Per Share

2015 (estimate) $5.12
2014 $4.90
2013 $4.96
2012 $4.46
2011 $4.06
2010 $1.22
2009 $2.38
2008 $1.92
2007 $1.23
2006 $1.89
2005 $1.89

Earnings Per Share – ModernGraham 

2015 (estimate) $4.87
2014 $4.47
2013 $3.98
2012 $3.26
2011 $2.49
2010 $1.72

Dividend History

Free Cash Flow

Conclusion

Discover Financial Services qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the short dividend history, while the company passes all of the Enterprising Investor’s requirements.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $2.49 in 2011 to an estimated $4.87 for 2015.  This level of demonstrated growth is greater than the market’s implied estimate of 1.25% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Discover Financial Services (DFS)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in any of the companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.

Discover Financial Services Quarterly Valuation – May 2015 $DFS

Discover_FinancialDiscover Financial Services (NYSE:DFS) presents an intriguing investment possibility for value investors, as the company has maintained very strong earnings growth over the last few years that may not be properly factored into the market price. Benjamin Graham, the father of value investing, taught that looking at the price cannot be the sole factor in investment decisions, as the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment’s merits. Here is a look at how the company fares in the ModernGraham valuation model.

The model is inspired by the teachings of Benjamin Graham, and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.

In addition, Graham strongly suggested that investors avoid speculation, in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another. By using theModernGraham method, one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.

DFS Chart

DFS data by YCharts

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Defensive Investor – Must pass all 6 of the following tests: Score = 5/6

  1. Adequate Size of Enterprise – Market capitalization of at least $2 billion – PASS
  2. Earnings Stability – Positive earnings per share for at least 10 straight years – PASS
  3. Dividend Record – Has paid a dividend for at least 10 straight years – FAIL
  4. Earnings Growth – Earnings per share has increased by at least 1/3rd over the last 10 years, using 3-year averages at the beginning and end of the period – PASS
  5. Moderate PEmg (price over normalized earnings) Ratio – PEmg is less than 20 – PASS
  6. Moderate Price-to-Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – Must pass all 3 of the following tests or be suitable for a Defensive Investor: Score = 3/3

  1. Earnings Stability – Positive earnings per share for at least 5 years – PASS
  2. Dividend Record – Currently pays a dividend – PASS
  3. Earnings Growth – EPSmg greater than that 5 years ago – PASS

Valuation Summary

Key Data

Recent Price $58.61
MG Value $181.76
MG Opinion Undervalued
Value Based on 3% Growth $70.77
Value Based on 0% Growth $41.49
Market Implied Growth Rate 1.75%
PEmg 12.01
PB Ratio 2.34

Balance Sheet – March 2015

Total Debt $23,090,000,000
Total Assets $84,178,000,000
Intangible Assets $432,000,000
Total Liabilities $72,967,000,000
Outstanding Shares 448,000,000

Earnings Per Share

2015 (estimate) $5.15
2014 $4.90
2013 $4.96
2012 $4.46
2011 $4.06
2010 $1.22
2009 $2.38
2008 $1.92
2007 $1.23
2006 $1.89
2005 $1.89

Earnings Per Share – ModernGraham

2015 (estimate) $4.88
2014 $4.47
2013 $3.98
2012 $3.26
2011 $2.49
2010 $1.72

Dividend History

DFS Dividend Chart

DFS Dividend data by YCharts

Conclusion

Discover Financial Services passes the initial requirements of the Enterprising Investor, but not the more conservative Defensive Investor. The Defensive Investor has an issue with the company’s inconsistent dividend history. The Enterprising Investor has no initial concerns. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $2.49 in 2011 to an estimated $4.88 for 2015. This is a very strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of only 1.75% over the next 7-10 years. The ModernGraham valuation model returns an estimate of intrinsic value falling above the current price, indicating that Discover Financial Services is undervalued at the present time.

Disclaimer: The author did not hold a position in any of the companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logos taken from either the company website or Wikipedia; this article is not affiliated with the companies in any manner.

[/level-mg-stocks-screens-subscriber]

Discover Financial Services Quarterly Valuation – February 2015 $DFS

Discover_FinancialIn the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid financial company in which to invest, because they require specific achievements over the historical period.  Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn’t be considered when evaluating the company’s prospects, but doing so would involve speculation.  We don’t know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before.  By continuing to require the same standards for the historical period, Intelligent Investors are able to whittle down banks to only those with the best financial position, and then they are able to determine an intrinsic value to get a sense of whether the company is a good investment.  In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Discover Financial Services (DFS) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Discover Financial Services is a direct banking and payment services company. The Company is a bank holding company as well as a financial holding company. The Company’s products include Direct Banking, Credit Cards, Student Loans, Personal Loans, Home Loans and Home Equity Loans and Deposits. The Company manages business activities in Direct Banking segment and Payment Services segment. Direct Banking segment includes consumer banking and lending products, specifically Discover-branded credit cards issued to individuals and small businesses on the Discover Network and other consumer banking products and services, including private student loans, personal loans, home loans, home equity loans, prepaid cards and other consumer lending and deposit products. The Payment Services segment includes PULSE, Diners Club and our network partners business, which includes credit, debit and prepaid cards issued on the Discover Network by third parties.

Defensive Investor – must pass all 6 of the following tests: Score = 5/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  3. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  5. Moderate PEmg ratio – PEmg is less than 20 – PASS
  6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3

  1. Earnings Stability – positive earnings per share for at least 5 years – PASS
  2. Dividend Record – currently pays a dividend – PASS
  3. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $58.70
MG Value $172.12
MG Opinion Undervalued
Value Based on 3% Growth $64.82
Value Based on 0% Growth $38.00
Market Implied Growth Rate 2.32%
PEmg 13.13
PB Ratio 2.39

Balance Sheet – December 2014

Total Debt $22,657,000,000
Total Assets $83,126,000,000
Intangible Assets $433,000,000
Total Liabilities $71,992,000,000
Outstanding Shares 453,000,000

Earnings Per Share

2014 $4.90
2013 $4.96
2012 $4.46
2011 $4.06
2010 $1.22
2009 $2.38
2008 $1.92
2007 $1.23
2006 $1.89
2005 $1.89

Earnings Per Share – ModernGraham 

2014 $4.47
2013 $3.98
2012 $3.26
2011 $2.49
2010 $1.72
2009 $1.93

Dividend History

Conclusion:

Discover Financial Services qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the inconsistent dividend record, while the company passes all of the Enterprising Investor’s requirements.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $1.72 in 2010 to $4.47 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 2.32% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price.

Be sure to check out previous ModernGraham valuations of Discover Financial Services (DFS) for greater perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Discover Financial Services (DFS)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Discover Financial Services (DFS) or in any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.

Discover Financial Services Quarterly Valuation – August 2014 $DFS

Discover_FinancialIn the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid financial company in which to invest, because they require specific achievements over the historical period.  Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn’t be considered when evaluating the company’s prospects, but doing so would involve speculation.  We don’t know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before.  By continuing to require the same standards for the historical period, Intelligent Investors are able to widdle down banks to only those with the best financial position, and then they are able to determine an intrinsic value to get a sense of whether the company is a good investment.  In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Discover Financial Services (DFS) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Discover Financial Services is a direct banking and payment services company. The Company is a bank holding company and a financial holding company. The Company offer credit cards, student loans, personal loans and deposit products through its Discover Bank subsidiary and home loans through its Discover Home Loans, Inc. subsidiary (Discover Home Loans). The Company operates the Discover Network, its credit card payments network; the PULSE network (PULSE), its automated teller machine (ATM), debit and electronic funds transfer network, and Diners Club International (Diners Club), its global payments network. The Company operates in two segments: Direct Banking and Payment Services. In June 2012, Tree.Com Inc sold the operating assets of its Home Loan Center, Inc. business to a wholly owned subsidiary of Discover Financial Services.

DFS Chart

DFS data by YCharts

Defensive Investor – must pass all 6 of the following tests: Score = 5/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  3. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  5. Moderate PEmg ratio – PEmg is less than 20 – PASS
  6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3

  1. Earnings Stability – positive earnings per share for at least 5 years – PASS
  2. Dividend Record – currently pays a dividend – PASS
  3. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $60.12
MG Value $175.71
MG Opinion Undervalued
Value Based on 3% Growth $66.18
Value Based on 0% Growth $38.79
Market Implied Growth Rate 2.34%
PEmg 13.17
PB Ratio 2.46

Balance Sheet – 6/30/2014

Total Debt $20,057,000,000
Total Assets $78,937,000,000
Intangible Assets $463,000,000
Total Liabilities $67,556,000,000
Outstanding Shares 465,302,000

Earnings Per Share

2014 (estimate) $5.18
2013 $4.96
2012 $4.46
2011 $4.06
2010 $1.22
2009 $2.39
2008 $2.20
2007 $1.23
2006 $2.04
2005 $1.09

Earnings Per Share – ModernGraham 

2014 (estimate) $4.56
2013 $3.98
2012 $3.28
2011 $2.53
2010 $1.78
2009 $1.97

Dividend History

DFS Dividend Chart

DFS Dividend data by YCharts

Conclusion:

Discover Financial Services is suitable for the Enterprising Investor as the company passes all of the investor type’s requirements, but is not suitable for the Defensive Investor as its dividend history is too short.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of American Express (AXP) and ModernGraham’s valuation of Capital One Financial (COF).  From a valuation side of things, the company appears undervalued after growing its EPSmg (normalized earnings) from $1.78 in 2010 to an estimated $4.56 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 2.34% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price.

Be sure to check out the previous ModernGraham valuations of Discover Financial Services (DFS) for more perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Discover Financial Services (DFS)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Discover Financial Services (DFS) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.

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