Discover Financial Services reported strong Q2 earnings. This quarter we passed our price target of $49.74 . This was due directly from our original thesis playing out. It has continued its strong internal growth which was the focus of our thesis. I foresee this continuing but at a slowing rate. After discussing with another analyst we decided it would be best to look into other payment exposure without the credit and interest rate risk. We will continue to explore other options.
DFS had a very good quarter overall. Both their direct banking and credit were strong. Their total loans growing by 6% to a total of 61.7 billion. There was also a 5% growth in their credit card loans, with their credit card sales volume growing 4%. Some of these gains were offset by losses in payment services due to the Diners franchise overseas. Net interest margin being up 9.44%. This is due to an overall decrease in funding costs. Overall delinquencies were significantly down y/y but only slightly down from last quarter. DFS is currently benefiting from the low delinquency rate and sustaining it is unlikely.
Going forward I am looking to sell DFS and replacing it with a similar company with less credit and interest rate risk. This is due to a successful thesis playing out and our price target being reached. I do feel that there is still upside in discover because the core thesis of organic growth still holds strong. There may be a similar company with more potential upside which I will begin looking for.
No comments:
Post a Comment