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Fan Yang

Discover Financial Services (DFS) in a Critical Bullish Continuation Breakout

`Since 2017, Discover Financial Services $DFS has been consolidating under $82 and above $58 for the most part. We did see price dip below $58 briefly at the end of 2018, but the overall trend remained sideways. This week, price action is suggesting a bullish scenario after a better-than-expected earnings report.

Discover (DFS) Q2 Earnings and Revenues Surpass Estimates (Yahoo)

Discover (DFS) came out with quarterly earnings of $2.32 per share, beating the Zacks Consensus Estimate of $2.11 per share. This compares to earnings of $1.91 per share a year ago. These figures are adjusted for non-recurring items.

This quarterly report represents an earnings surprise of 9.95%. A quarter ago, it was expected that this credit card issuer and lender would post earnings of $2 per share when it actually produced earnings of $2.15, delivering a surprise of 7.50%.

Over the last four quarters, the company has surpassed consensus EPS estimates two times.

Discover, which belongs to the Zacks Financial - Consumer Loans industry, posted revenues of $2.85 billion for the quarter ended June 2019, surpassing the Zacks Consensus Estimate by 1.95%. This compares to year-ago revenues of $2.60 billion. The company has topped consensus revenue estimates three times over the last four quarters.

The sustainability of the stock's immediate price movement based on the recently-released numbers and future earnings expectations will mostly depend on management's commentary on the earnings call.

Discover shares have added about 39.6% since the beginning of the year versus the S&P 500's gain of 19.1%.

What's Next for Discover?

While Discover has outperformed the market so far this year, the question that comes to investors' minds is: what's next for the stock?

There are no easy answers to this key question, but one reliable measure that can help investors address this is the company's earnings outlook. Not only does this include current consensus earnings expectations for the coming quarter(s), but also how these expectations have changed lately.

Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions. Investors can track such revisions by themselves or rely on a tried-and-tested rating tool like the Zacks Rank, which has an impressive track record of harnessing the power of earnings estimate revisions.

Ahead of this earnings release, the estimate revisions trend for Discover was mixed. While the magnitude and direction of estimate revisions could change following the company's just-released earnings report, the current status translates into a Zacks Rank #3 (Hold) for the stock. So, the shares are expected to perform in line with the market in the near future. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

It will be interesting to see how estimates for the coming quarters and current fiscal year change in the days ahead. The current consensus EPS estimate is $2.27 on $2.88 billion in revenues for the coming quarter and $8.77 on $11.40 billion in revenues for the current fiscal year.


DFS Daily Chart

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Subtle Clues Ahead of Breakout:
- There were a couple of clues ahead of the bullish breakout.
- First of all, the late 2018 bearish break followed by a V-Shape reversal was a sign that bears were weak in this market.
- Then, the  RSI pushed above 70 and then held above 40 for the most part - a sign of bullish momentum developing.
- Price also started to hold above the moving average cluster, which reflect a bullish market.
- The $82-$82.10 resistance are could not hold against this recent run-up. 
- The bullish breakout is on, and the $80-$82 area is now considered key support for this bullish continuation scenario.
- I say bullish continuation because we can see that DFS's overall long-term trend is bullish.

DFS Weekly Chart

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