Discover Financial Forms Bullish Cup Pattern, Nearing Buy Point

The Discover card from Discover Financial Services NYSE: DFS may not be as widely accepted as cards from Visa Inc. NYSE: V, Mastercard Inc. NYSE: MA or American Express Company NYSE: AXP, and Discover’s market capitalization and revenue may be smaller, but Discover’s stock is currently outperforming all those rivals. 

Discover shares are up 20.47 % in the past month as the stock climbs out of a base that it began forming in February. The stock’s up/down volume ratio is 1.5, indicating stronger buying trends compared to selling pressure over the past 50 trading sessions. 

Discover Financial Services’ chart shows the stock forming a cup-shaped pattern with a current buy point north of $119.91. It hit resistance just below that point on June 14 and is now trading less than 4% below that point. The stock has been seeing some selling in recent sessions, although it remains 11.5% above its 50-day moving average and appears to be forming a handle.

A handle would potentially be good news, as it could offer a lower entry point. If it does go on to form a handle, the new buy point would be $118.85. If you set the MarketBeat Discovery Financial Services chart to either a bar or candlestick view, you can easily identify that handle buy point, reached on June 14. 

More Than A Credit Card Issuer

While Visa, Mastercard and American Express didn’t suffer too much due to the banking-crisis fallout in March, Discover shares tumbled 11.75% that month. The reason? Discover has a different business model than any of those companies.  

Discover is known for its credit cards, but it actually operates a bank and other payment-processing services. It has no physical bank branches but operates a network of more than 415,000 ATMs throughout the U.S., many of which are no-fee. 

That’s different from Visa and Mastercard, which are payment processors. Those companies don’t actually issue cards, instead partnering with banks that handle that part of the value chain. 

Discover and American Express differ because they actually issue the cards as well as process the transactions.

Increasing Usage By Existing Cardholders

In filings, Discover Financial says a key element of its business strategy is to increase the usage of its credit card by existing customers, including making it their primary credit card, thereby increasing revenue from transaction and service fees and interest income

Discover’s revenue growth accelerated in the past two quarters. 

In the first quarter, which the company reported on April 19, total loans grew by 21%, and total revenue grew by 29%. 

The total net chargeoff rate increased to 2.72% from 1.61% in the year-earlier quarter. That rate refers to the percentage of loans or credit card balances that a financial institution writes off as losses, typically due to non-payment or default by borrowers. It’s expressed as the amount of uncollectible debt relative to the total outstanding loan or credit card portfolio of the institution. 

A higher charge-off rate indicates a higher level of financial risk for the institution, but Wall Street doesn’t seem too concerned about that in Discover’s case.

Analysts Boosting Price Targets

A glance at MarketBeat’s Discover Financial Services earnings data shows that since the company’s last earnings report, three analysts boosted their price targets on the stock, and two more reiterated their “outperform” ratings. 

In the current economic environment, with rising interest rates, housing costs, and debt levels, analysts expect to see a higher number of consumers unable to service their debt. Some analysts expect to see those levels continue to rise in the next two years, as the risk of high net charge-offs is well-known in the credit-card industry. 

However, card revenue can be extremely lucrative, as issuers can charge higher interest rates than banks or other lenders, which can result in healthy profit margins. 

Wall Street expects earnings to decline by 14% this year, to $13.34 a share, before rebounding to growth again in 2024.