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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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.


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
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



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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


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.

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