Discover Earnings: Higher Credit Costs Hurt Bottom-Line Results

Narrow-moat Discover reported weak third-quarter results as the bank's credit costs rose sharply. Discover's net revenue increased 17% from last year to $4.04 billion. Earnings per share declined 27% year over year to $2.59, which translates to a return on equity of 19%. The drop in profitability was due to higher credit provisioning costs, as the company built $601 million in reserves during the quarter. As we incorporate these results, we do not expect to materially alter our $152 per share fair value estimate. We see the shares as undervalued right now.