Stock Valuation: Discover Financial Services (DFS)

Name of Company Country of Origin/ Exchange Traded Sector Stock Price
DISCOVER FINANCIAL SERVICES US/
NYSE
Financial Services – Credit Services – Credit Services USD70.44
@ 07 Jul 2018
COMPANY PROFILE Discover Financial Services is engaged in direct consumer banking business. It mainly provides banking services such as accepting deposits, offering credit card, residential mortgage, loans and other banking facilities to its customers.

Discover Financial Services engages in direct consumer banking services, taking deposits and offering credit card, student, and other loans to its customers. The firm also operates the Discover, Pulse, and Diners Club networks. The majority of transactions processed by the firm are of the closed-loop variety, in which Discover issues cards to customers as well as maintains direct relationships with merchants. However, the company has opened the network to third-party issuers and acquirers in recent years.

Stock Code DFS
Stock Valuation Below

Discover Financial Services Price to Book

Price to Earnings, Price to Sales and Price to Cash Flow ratios all value a company based on what it is generating (i.e. profits, sales or cash flow). Price to Book ratio is different in that it values a company based on what it owns (i.e. its net assets). This is usually a suitable valuation indicator for a financial institution, which frequently revalues its assets and liabilities, or a company with huge asset base e.g. utilities company.
At the price of USD70.44 as at 07 Jul 2018, Discover Financial Services is trading at a Price to Book Ratio of 2.2 times current book value.  This is a 6% premium to its historical average Price to Book Ratio of 2.1 times.
Is the stock overvalued? One should not just look at one indicator to determine the fair value of a stock.
ProThinker believes in using a combination of valuation methods to decide whether a stock is over or undervalued? The five ratios we use are Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield. We use multiple methods to value a stock because each has its benefits as well as shortcomings. Price to Earnings and Price to Cash Flow Ratios relate stock price to profitability but are meaningless when the comany has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but it is not directly related to the company’s profitability. Dividend Yield cannot be used for companies that are paying little to no dividends.
While it is important to value stocks based on multiple valuation methods, this often leads to differing views on valuation. One indicator may suggest that a stock is overvalued while another suggest that it is undervalued. This does not help an investor who needs to make a definite decision whether to buy, hold or sell the stock. That is why we advocate the use of a Composite Valuation Indicator, which is derived from the best combination of the five indicators above. A Composite Valuation Indicator will give you ONE conclusion on whether a stock is under or over valued.
To find out more about our valuation methodology, click here. 
Source of Data: Charts are from ProThinker Stock Report. Company description, historical financial statements data and price data are from gurufocus.com. Estimates are from gurufocus and/or 4-traders.com – Thomson Reuters.
Disclaimer: This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither ProThinker nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of ProThinker. Copyright(c) 2018. All rights reserved.

 

Leave a Reply

Your email address will not be published. Required fields are marked *