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Discover Financial (DFS) Rallies 38.6% YTD: More to Run?

Zacks Equity Research

Discover Financial Services DFS seems to have caught investors’ attention who acknowledge its growing top line, well-performing Direct Banking Business and a soaring card sales volume.

The company is one of the major card issuers in the United States and a leading innovator in the credit card industry. It is active in forging alliances and partnerships owing to which, card sales volume expanded on average rate of 4.6% in the last five years on the back of a rise in customer base using Discover card.

In a year’s time, this Zacks Rank #3 (Hold) stock has surged 38.6% year to date, outperforming its industry's growth of 31.4%.

What is Driving the Stock?

Last week, Discover Home Equity Loans achieved a breakthrough point by crossing $1 billion in loan balance as well as by doubling origination volume in each of the last couple of years. This landmark feat has made it the second biggest originator of closed-end second mortgages in the United States.

The company has witnessed significant growth in this line and expects the trend to continue going forward. It is in fact, taking up initiatives, such as hiring experts for excellent customer services, which are expected to help Discover Home Equity Loans flourish in the impending quarters.

Discover Financial has been witnessing a strong revenue story, which is evident from its 2013-2018 CAGR of 5.4%. This upside was mainly boosted by higher net interest income and other total income. We expect the company to retain its favorable revenue stream going forward fuelled by its attractive core business and a dominant market position.

Secondly, its Direct Banking business has also been running well over the past several years. Within this space, the private student loan portfolio has grown significantly from $1 billion in 2010 to nearly $88.2 billion in 2018. The segment is well-poised for growth in the upcoming quarters.

The company has undertaken a number of initiatives to burgeon its customer base. Last month, its payment brand Discover Global Network and Verve — a market-leading payments technology company — collaborated to launch the Verve Global Card with the aid of which cardholders can now access their Verve Global Cards on the Discover Global Network, thus enabling acceptance at numerous merchants across the globe.

Discover Global Network also entered into an agreement with Sage Pay in May via which, the latter provides Discover Global Network cardholders with better and wider options for online and in-store purchases consisting of Discover, Diners Club and affiliate network card users in the UK and across Ireland. We expect the company to continue with its initiatives for launching products, tailored to suit specific customer needs in order to attract new clients.

Discover Financial’s capital position also impresses. The company has implemented several capital-boosting measures including equity and debt offerings, which have helped it to achieve a sturdy capital standing. A disciplined capital deployment should instill investors’ confidence in the stock.

Is Further Upside Left?

We expect the company to witness a consistent price surge on the back of its solid fundamentals, such as capital management and expanded card sales.

Its return on equity — a profitability measure — of 26.7% is higher than the industry's 13.3% average, which remains attractive.

Stocks to Consider

Investors interested in the same space might take a look at some better-ranked stocks like Fiserv, Inc. FISV, Visa Inc. V and Cardtronics PLC CATM. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Fiserv and units provide financial services technology worldwide. It sports a Zacks Rank #1 and managed to pull off average four-quarter positive surprise of 0.6%.

Visa works as a payments technology company across the globe. It carries a Zacks Rank #2 (Buy) and managed to deliver average positive surprise of 3.4%.

Cardtronics offers automated consumer financial services through its network of automated teller machines and multi-purpose financial services kiosks. The company came up with average four-quarter beat of 37.5% and flaunts a Zacks Rank of 1.

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