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Discover Financial Shares Hit 52-Week High

Zacks Equity Research

On Dec 31, 2013, shares of Discover Financial Services (DFS) reached a new 52-week high of $56.20. The momentum was driven by continued solid performance by the company, sustained focus to strengthen its product portfolio and efficient capital management.

With respect to earnings trend, this financial service providing company witnessed positive earnings surprises in two of the last three quarters, with an average beat of 7.4%. In the last reported quarter, earnings successfully met the Zacks Consensus Estimate.

Discover Financial’s top line rose 2.8% year over year to $2.06 billion, beating the Zacks Consensus Estimate of $1.77 billion, driven by higher card sales volume. Higher revenues coupled with lower expenses made way for margin expansion.

Rapid domestic expansion and forays into new countries via alliances is boosting card acceptances and is expanding the company’s network. The acquisition of Diners Club Italy and its wholly-owned subsidiary Dinit in May 2013 and the alliance with Vietnam-based Smartlink Card Service JSC in Nov 2013, comply with the company’s global expansion strategies.

Further, Discover Financial has broadened its product portfolio by launching Discover Home Equity Loans that should bridge the gap between its personal and home loans. Additionally, curbing interest rates on student loans, the acquisition of Home Loan Center and business expansions through alliances with EMVCo, Ariba and Paydiant should drive numbers of Discover Financial going ahead.

Discover Financial also has an efficient capital management policy. The company authorized a $2.4 billion share repurchase program in Mar 2013, scheduled to expire in Mar 2015, to replace the previous $2 billion program. Moreover, a strong cash position and a promising future outlook influenced management to increase Discover Financial’s dividend by 43% in Apr 2013.

The company is scheduled to release its fourth quarter and full-year 2013 results on Jan 23, 2014. The Zacks Consensus Estimate for 2013 is pegged at $4.93, up 10.5% year over year. The Zacks Consensus Estimate for 2014 is $5.08, up 3.2% year over year. The overall long-term expected earnings growth rate for this stock is 9.5%.

Valuation looks reasonable for Discover Financial. The shares are trading at a premium to the peer group average, both on a price-to-book basis and forward price-to-earnings basis. Return on equity remains 14.6% above the peer group average. The 1-year return from the stock is 47.3%, higher than the S&P 500’s estimated return of 31.8%.   

Discover Financial currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the financial services sector include Encore Capital Group, Inc. (ECPG), Portfolio Recovery Associates Inc. (PRAA) and American Express Co. (AXP). While Portfolio Recovery carries a Zacks Rank #1 (Strong Buy), Encore Capital and American express hold a Zacks Rank #2 (Buy).

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