In 2024, the impact of generative AI, industry convergence, embedded finance, open data, and digital identity will likely shape the banking and capital markets industry. The growing demand for digital banking products and services reflects a key trend toward digitalization in the financial sector.
Financial stocks Blackstone Inc. (BX) and Discover Financial Services (DFS) are expected to report their first-quarter earnings this week. It could be wise to wait for a better entry point in these stocks ahead of their earnings.
Before taking a closer look at the fundamentals of these stocks, let’s examine the factors influencing the financial industry’s outlook.
Rising utilization of digital banking services, increasing demand for swift and real-time fund transfers, growing incorporation of blockchain within the banking industry, and the expanding wealth of high-net-worth individuals (HNWIs) contribute to the financial sector’s expansion. The financial services market is projected to grow at a CAGR of 7.6% to total $44.93 trillion by 2028.
Major trends in the financial sector include integrating smarter safety systems into financial services, adopting AI and cloud technology, and offering custom and personal services, especially for wealth management. Moreover, the payments industry has experienced a rapid surge in the adoption of EMV technology.
For instance, influential financial institutions, including banks, asset management firms, and insurance providers, are increasingly recognizing the potential of generative AI in several applications within the financial industry, like risk assessment, trading algorithms, fraud detection, cost reduction, and customer service.
The generative AI in financial services market is expected to register a CAGR of 27.3% from 2024 to 2033.
Besides, the availability of a huge volume of capital in the market and the increasing need for diversification of this capital are primary reasons for the robust growth of the private equity market. According to the IMARC Group, the global private equity market is expected to reach $1.58 trillion by 2032, exhibiting a CAGR of 9.1% during the forecast period.
Now, let’s discuss the fundamentals of BX and DFS in detail:
Blackstone Inc. (BX)
BX is an alternative asset management company specializing in real estate, private equity, credit, hedge fund solutions, secondary funds of funds, public debt and equity, and multi-asset class strategies. The firm generally invests in early-stage companies and offers capital markets services.
On April 8, 2024, BX and Apartment Income REIT Corp. (AIRC) entered a definitive agreement under which Blackstone Real Estate Partners X will acquire all outstanding common shares of AIR Communities for $39.12 per share in an all-cash transaction valued at nearly $10 billion.
AIR Communities’ portfolio comprises 76 high-quality rental housing communities concentrated mainly in coastal markets, including Miami, Los Angeles, Boston, and Washington D.C. Blackstone intends to invest more than $400 million to maintain and enhance the existing communities within the portfolio, with potential investments to fund further growth.
In terms of forward non-GAAP P/E, BX is trading at 25.03x, 149.9% higher than the industry average of 10.01x. Also, the stock’s forward Price/Sales and Price/Cash Flow multiples of 7.10 and 18.75 are higher than the respective industry averages of 2.43 and 10.86.
BX’s trailing-12-month gross profit margin of 93.13% is 56% higher than the industry average of 59.70%. Its trailing-12-month ROTA of 3.45% is 217.3% higher than the industry average of 1.09%. However, the stock’s trailing-12-month net income margin of 18.10% is 23.9% lower than the industry average of 23.80%.
For the fourth quarter that ended December 31, 2023, BX’s total revenues decreased 24.6% year-over-year to $1.29 billion. However, the company’s distributable earnings came in at $1.39 billion, up 4% from the prior year’s quarter. Its distributable earnings per common share rose 3.7% year-over-year to $1.11.
In addition, the company’s adjusted EBITDA grew 6.5% year-over-year to $1.66 billion.
Blackstone is scheduled to release its first-quarter financial results on Thursday, April 18, 2024. Analysts expect BX’s revenue for the quarter (ended March 2024) to increase 4.3% year-over-year to $2.59 billion. However, the company’s EPS for the same period is expected to decline marginally year-over-year to $0.97.
In addition, BX missed consensus revenue estimates in three of the trailing four quarters, which is disappointing.
BX’s stock has gained 15.9% over the past six months to close the last trading session at $121.17. However, the stock has plunged 2.1% over the past month.
BX’s POWR Ratings reflect its mixed outlook. The stock has an overall rating of C, equating to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
BX has a C grade for Growth, Stability, and Quality. In the Private Equity industry, it is ranked #22 out of 34 stocks.
Click here to access additional ratings of BX (Momentum, Value, and Sentiment).
Discover Financial Services (DFS)
DFS offers digital banking products and services, and payment services. The company operates in two segments: Digital Banking and Payment Services. It provides Discover-branded credit cards to individuals; private student loans, personal loans, home loans, and other consumer lending; and direct-to-consumer deposit products.
On April 9, DFS announced a strategic collaboration with Google Cloud to introduce generative AI technology into its customer care centers. This partnership aims to transform customer and agent service and enhance agent productivity, offering faster, more personalized, and efficient resolutions. This collaboration should bode well for the company.
In terms of forward non-GAAP Price/Sales, DFS is trading at 1.84x, 24.2% lower than the industry average of 2.43x. However, its forward non-GAAP P/E of 10.92x is 9% higher than the 10.01x industry average. The stock’s forward Price/Book of 1.85x is 83.5% higher than the industry average of 1.01x.
DFS’ trailing-12-month gross profit margin and net income margin of 93.82% and 29.87% are 57.2% and 25.5% higher than the industry averages of 59.70% and 23.80%, respectively. However, the stock’s trailing-12-month asset turnover ratio of 0.07x is 67.3% lower than the industry average of 0.21x.
During the fourth quarter that ended December 31, 2023, DFS’ total revenue net of interest expense increased 12.8% year-over-year to $4.20 billion. Its total loans ended the quarter at $128.40 billion, up 15% year-over-year. However, its net income and EPS came in at $388 million and $1.54, down 62.1% and 58.8% year-over-year, respectively.
Discover Financial Services is expected to report its first-quarter results on Wednesday, April 17, 2024, after the market closes. Analysts expect DFS’ revenue for the quarter (ended March 2024) to increase 8.9% year-over-year to $4.09 billion. However, the consensus EPS estimate of $3 for the same period indicates a decline of 16.2% year-over-year.
For the fiscal year ending December 2024, Street expects the DFS’ revenue to grow 3.7% year-over-year to $16.45 billion, but its EPS is expected to decrease 1.7% from the prior year to $11.07. The company failed to surpass consensus EPS estimates in all four trailing quarters.
Shares of DFS have soared 33.6% over the past six months to close the last trading session at $121.31. However, the stock declined 1.6% over the past month.
DFS’ mixed fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, translating to a Neutral in our proprietary rating system.
The stock has a C grade for Quality, Value, Sentiment, and Stability. DFS is ranked #38 out of 46 stocks in the Consumer Financial Services industry.
In addition to the POWR Ratings I’ve just highlighted, you can see DFS’ ratings for Growth here.
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BX shares were unchanged in premarket trading Tuesday. Year-to-date, BX has declined -6.74%, versus a 6.46% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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