Discover stock slides on lower net income, higher charge-off rate

Yahoo Finance Live anchors discuss fourth-quarter earnings for Discover.

Video transcript

[AUDIO LOGO]

- Discover Financial Services, this is the ticker symbol DFS. It's down this morning by about 6.8%, despite topping earnings expectations. The company saw net income drop 3% year-over-year while total net charge off rates came in higher than anticipated. I think what the Street latching on to, though, here this morning, Jared, is some of the provisions for credit losses.

And you're keeping a close eye for any of the companies within this card operations or transaction services business around where their delinquency rates are starting to move higher here a little bit. You saw that within the delinquency rate of 30 or more dates moving higher, as well as the delinquency rate of 90 or more days. Plus, the allowance for credit losses, that also budging higher for Discover.

So investors, perhaps, looking into this and saying, OK, clearly, if the delinquencies are causing Discover to have to account for more time that consumers are gonna take to pay them back, then that's gonna be something that hits on Discover's financials. That's something that the investors would have to adjust for on their sides as well.

JARED BLIKRE: You bet. Delinquencies lead to Net Charge Offs, NCOs. And that's kind of the name of the game here. I got some notes from the Street.

Piper Sandler, overweight, price target $113, saying that-- they're noting that the rapid net charge off growth will likely be an issue across the industry due to outsized growth the last two years. And so if that is across the industry, this a potential bellwether for more stocks that we're covering here. And this is the time of the quarter when we're getting all these financial players.

Also, KBW outperformed price tag at $135, saying that investors are nervous about credit quality but the guidance isn't thesis changing. And I got one more here. And this is Citigroup, neutral price target, $113, saying the company's guidance mixed but noting that earnings materials lacked details of assumptions, including in guidance, which would appear to us to imply the beginning of a mild recession assumed.

So companies getting a little bit murkier about their future, well, that might be indicating that there is a recession on the horizon. And also by Citigroup here, while likely a positive, long-term investors will likely question growing consumer loans by double-digits as we likely enter into a recession.

So all getting back to that R-word that we've been talking about, Brad. And let me just-- we have that stock up on the screen here. This is-- the stock has been in a-- trending sideways. So this is basically a horizontal formation, just kind of treading water here.

But you look at the last few years, really interesting to see what's happened since the pandemic basically hit this bottom here, rallied, and have hit a top, and now have broken out of this trend line. So incremental progress there. But it's hard to get excited based on some of these comments here.