Discover Financial stock took a significant hit after the credit-card company delivered a string of negative news. However, one team of analysts believes that this presents a unique opportunity.
Reporting Weak Earnings and Share Buyback Pause
On Wednesday, Discover (ticker: DFS) reported earnings that fell short of expectations and also announced a temporary halt in share buybacks. Additionally, the company revealed that it had incorrectly categorized certain credit-card accounts since around 2007, resulting in increased costs for some merchants but not for cardholders.
According to the company’s most recent financial statements, they have allocated $365 million to cover merchant refunds; however, the final amount is still uncertain. To address the issue, Discover has enlisted the services of a law firm for an investigation and is currently engaged in discussions with regulators. Share buybacks will remain on hold until the review process is complete.
Regulatory Concerns
In addition to its internal challenges, Discover’s management disclosed that they have received a proposed consent order from the Federal Deposit Insurance Corp. regarding consumer compliance. They made it clear that this issue is unrelated to the credit-card account misclassification. It is possible that regulators may take further action in this regard.
Analysts Remain Optimistic
RBC Capital Markets analysts expressed disappointment over the share-buyback pause but view the long-term impact of the consent order as manageable. They maintain their Outperform rating on the stock and have set a price target of $142.
Similarly, William Blair analysts, who also rate the shares at Outperform, believe that investors should seize the opportunity presented by the potential selloff and purchase the shares.
Worse-Than-Expected Earnings
For the second quarter, Discover reported net income of $901 million, an 18% decrease compared to the previous year. This figure fell short of Wall Street’s consensus forecast of $930 million.
In summary, Discover Financial stock has experienced significant declines following a series of setbacks. However, analysts believe that this presents an attractive opportunity for investors. It is worth monitoring the impact of the consent order and the ongoing investigation into the credit-card account misclassification issue.
