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Why Shares of Discover Financial Are Trading Down Today

By Lou Whiteman - Jan 24, 2020 at 10:17AM

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The credit card giant intends to spend more on marketing and tech in 2020.

What happened

Shares of Discover Financial Services (DFS 1.08%) fell about 10% on Friday morning following the financial services company's fourth-quarter earnings report. Discover actually beat the consensus earnings estimate by a penny, but investors were more focused on the company's cost forecast for 2020.

So what

After markets closed Thursday, Discover Financial reported fourth-quarter earnings of $2.25 per share on revenue of $2.94 billion, compared to Wall Street expectations for $2.24 per share in earnings on sales of $2.95 billion. But the company's total net charge-off rate of 3.19% was up 11 basis points year over year, and Discover raised its provision for loan losses to $836 million, from $799 million in the third quarter and $800 million in the fourth quarter of 2018.

A hand-held credit card processing machine.

Image source: Getty Images.

Total operating expenses were up $75 million year over year due to higher employee compensation costs and investments in technology.

Discover management on a post-earnings call with investors said to expect expenses to remain on the upswing in 2020, as the company focuses on marketing the brand and building its technology. Chief Financial Officer John T. Greene said that Discover expects those investments to pay off over time but admitted there could be some lag in that payoff:

There is the investment in brand to drive awareness and considerations. We haven't actually baked it in, but we think that over time [we] will lower our acquisition cost -- our per-unit acquisition cost as people find greater awareness of Discover, the product offerings, the customer experience, and frankly a fair value exchange. ... The other piece around technology investments -- we're going to be very judicious about those and with those to make sure that we are deploying functionality that help[s] make a difference to either our growth trajectory or our expense profile. So over time, I would expect that indeed we'll see efficiency gains, either top line or through the expense base.

Now what

We're in a tricky environment for bank stocks, with interest rates remaining stubbornly low and competition between financial institutions driving down margins. Discover's investments might be wise long-term moves, but in the near term the extra costs figure to affect 2020 earnings. A number of Wall Street analysts lowered 2020 estimates following the call, and the stock is acting accordingly.

There is a lot to like about Discover, but investors on Friday are betting that the upside is going to take a while to materialize.

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