On Friday, Seaport Global Securities adjusted its rating on Discover Financial (NYSE:DFS) shares from Buy to Neutral. The revision follows Discover Financial's disclosure of credit card trends for February 2024, which highlighted higher than anticipated charge-off rates.
Discover Financial reported a slight decline in delinquency rates for February, in line with seasonal expectations. The month-over-month decrease was 1 basis point, bringing the delinquency rate to 4.01%, closely matching the historical average decrease of 3 basis points. Year-over-year, delinquencies were up by 127 basis points, a slight improvement from the increases observed in December and January.
However, the charge-off rate for February rose by 63 basis points month-over-month and 246 basis points year-over-year to 5.86%. This uptick suggests that the first quarter's charge-off rate may surpass the consensus forecast of 5.40%. Seaport Global anticipates the charge-off rate to peak in mid-2024, then stabilize for the rest of the year, with a potential decline in 2025.
Growth in Discover Financial's credit card portfolio also exhibited a slowdown, with a year-over-year increase of 11.5% in February, down from 12.2% in January and significantly lower than the 22.6% peak in February 2023. The market consensus for year-over-year growth in the first quarter of 2024 is 8.8%.
The downgrade by Seaport Global is also influenced by Discover Financial's impending acquisition by Capital One, which carries a Neutral rating as well. The firm clarified that the change in rating is not due to a loss of confidence in the transaction's completion, which is expected to occur in late 2024 or early 2025.
InvestingPro Insights
Amidst the concerns raised by Seaport Global Securities regarding Discover Financial's (NYSE:DFS) credit card trends, InvestingPro data provides additional context for investors. The company's Market Capitalization stands at a robust $30.87 billion, with a Price/Earnings (P/E) Ratio of 11.01, reflecting its earnings relative to share price. More specifically, the Adjusted P/E Ratio for the last twelve months as of Q4 2023 is 10.45. These valuations suggest that Discover Financial's stock might be trading at a reasonable price relative to its earnings.
Furthermore, the company's Gross Profit Margin is notably high at 93.82% for the same period, indicating strong profitability on its revenue, which was $9.842 billion. This financial health is further underscored by a solid Operating Income Margin of 40.21%, which shows the efficiency of the company's core business operations.
Investors might also take interest in Discover Financial's dividend track record. According to InvestingPro Tips, the company has not only maintained its dividend payments for 18 consecutive years but has also raised its dividend for 13 consecutive years, showcasing a commitment to returning value to shareholders. Additionally, the company is trading near its 52-week high, with a price that is 96.98% of this peak, and has experienced a large price uptick over the last six months, with a 39.91% total return.
For those considering a deeper dive into Discover Financial's investment potential, there are 7 additional InvestingPro Tips available, which can be accessed with a subscription. Interested readers may use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, providing further insights to help make informed decisions.
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