Discover Financial Services (DFS) reported earning December 20th, 2012. The missed analyst estimates by $.04 with a diluted EPS of $1.07. The news caused DFS to drop 3.42% on the day to close at $38.41.
The earnings were strongly affected by the increase in company expenses. They have increased 18% mostly associated with their acquisition of Tree.com. The increase was largely due to higher employee compensation and the marketing expenses associated with Home Loan Center (a piece of Tree.com), an increased card marketing initiative and a higher headcount. These increased expenses are anticipated to go into the next quarter. As we expected card delinquencies did increase. They increased 5bps however, net charge- offs rates declined 14bps to a new historic low.
The companies ROE was 23%. DFS is continuing on its goal of organic growth. The company issued a $.40 dividend which is a 40% increase and also repurchased 2% of the shares outstanding. Their direct banking pretax income was $827 million which was up 51 million (7%) from the year prior. Both Discover's sales volume and credit card loans were up 6% from a year prior. Personal and Private student loans grew 11% from the prior year. Also other income had an increase of 50 million (11%) from last year largely due to Discover Home Loans which was created from the Tree.com acquisition. In the future discover will be switching to a December fiscal year.
Going forward, we expect to maintain these increased levels of expenses. Because the company is looking for organic growth these expenses will lead to a boost in revenue. DFS is at the beginning stages with Discover Home Loans, which I believe will be a large revenue driver. The second quarter of 2013 the PayPal deal Discover has will go into affect. This agreement can also lead to increased revenues. Discover has continued their strong growth and I think we should continue to hold DFS.