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.
[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
| 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
| 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
Other ModernGraham posts about related companies
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.
