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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

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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

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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.

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