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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

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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.

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