One of America's most popular credit card companies, Discover, is having a bad day. In fact, dropping as much as 11% today after announcing Q4 earnings, DFS has suffered its biggest one day drop since the financial crisis, even greater than the 9% drop recorded on the day the US was downgraded in August 2011.
What was behind this tremendous drop? After all, Discover not only did not miss earnings, it reports Q4 EPS of $2.25 that beat Wall Street consensus estimates of 2.24 and were above the 2.03 EPS reported a year ago. No, the reason for the plunge was not to be found on the income statement, but rather the balance sheet, where Discover reported that its Q4 credit card net principal charge off rate had unexpectedly jumped from 3.32% in Q3 to 3.41% in Q4, and 18bps higher than Q4 2018. In fact, as shown in the chart below, while not quite the highest charge off rate (which follows a seasonal pattern) in the past decade, this was the highest Q4 charge off going back all the way to financial crisis (specifically 2011 when the company's charge off rate plunged from over 5% to the high 2%s).
And while the sellside was quick to pointsout what was painfully obvious in retrospect, and rushed to downgrade the stock after the fact, as follows...
- Evercore ISI analyst John Pancari cut the recommendation on Discover Financial Services to underperform from inline. PT set to $75, implies a 13% decrease from last price. Discover Financial average PT is $92.89. Targets range from $75 to $105
- Piper Sandler cut the recommendation on Discover Financial Services to neutral from overweight. PT set to $86, implies a 0.2% increase from last price. Discover Financial average PT is $90.63. Targets range from $75 to $105
... the bigger question once goes to the strength of the driving force behind the US economy, namely the US consumer, because if Discover's charge off data is indicative of the deterioration that is taking place below the surface, the US consumer is already tapped out and that's with stocks at all time high and unemployment at all time low, both on the back of the Fed's unprecedented interventions in the economy. What happens when the Fed stops? (Incidentally, that's a rhetorical question: the Fed can no longer afford to stop and the best it can do is go down with the ship.)