Discover Financial Stock Dips After Dull Report

Riverwoods, Ill.-based Discover Financial Services (NYSE:DFS) is a credit card processor that has seen its stock price outperform its competitors in 2010. However, today Discover Financial’s stock price was smacked by investors on Wall Street after a distaste for the release of major loan-loss reserves and a top-line decline. Following the early morning selling reaction, shares have rebounded and leveled off. Here’s the latest earnings breakdown:

Earnings: Increased by 5% to $.64 per share, or $346.5 million, compared to $.60 per share, or $330.5 million, in the same period a year ago.

Revenue: Decreased to $1.6 billion this quarter, compared to $1.73 billion in the same quarter a year ago.

Actual versus Wall Street Expectations: Earnings of $.64 cents per share beat expectations by $.21 cents.  The consensus analyst earnings expectation was $.43 cents per share (Thomson Reuters).

Notable Stats: Discover card sales volume was $23 billion in the quarter, an increase of 6% from last year.

Total loans ended the quarter at $48.8 billion, down 4% compared to the prior year reflecting a decline in credit card loans as well as the previously disclosed $1.5 billion sale of federal student loans.

In September of this year, Discover agreed to buy Citigroup’s (NYSE:C) Student Loan Corp. in a $600 million deal that would make it the third-biggest U.S. provider of private student loans.

The DFS board declared a cash dividend of $.02.

Did You Hear That? David Nelms, Chairman and CEO of Discover, stated, “We are working to achieve some modest credit-card portfolio growth in the second half of 2011,”

Commentary: Discover is competing in a field dominated by Visa (NYSE:V), Mastercard (NYSE:MA) and American Express (NYSE:AXP). However, DFS still manages to hold a single digit market share of the credit card business. Shares of DFS have risen 30% this year through yesterday. Meanwhile, Visa has seen its shares decline 12%, Mastercard has seen its shares decline almost 3% and American Express has seen its shares climb 14%. Discover’s stock price has appreciated nicely and remained above both the 50-day and 200-day moving averages since September. Today was the first time the 50-day moving average was tested as support on the 6 month chart below. After today’s cautious report, we’ll wait-and-see if Discover can deliver next quarter.

Disclosure: No position in DFS.

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