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Why Should You Hold Discover Financial in Your Portfolio?

Zacks Equity Research

Discover Financial Services DFS is well poised for growth on the back of rising revenues and robust card sales volume.

Over the past 30 days, its 2020 estimates have moved 0.1% north year over year. This, in turn, reflects analysts' optimism on the stock.

Its return on equity — a profitability measure — is 24.8%, better than the industry average of 18.9%. This echoes the company’s efficiency in utilizing its shareholders’ funds.

The company is well-placed for growth, evident from its favorable VGM Score of A. Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors.

It also retained investors' favorable sentiments by maintaining its positive surprise trend in three of the last four quarters, the average beat being 1.42%. This definitely vouches for the company’s operational excellence.

It recently delivered first-quarter 2019 adjusted earnings of $2.15 per share, beating the Zacks Consensus Estimate by 7.5% as well as rising 18.1% year over year on higher revenues and increased loans. Revenues, net of interest expenses, increased 7.3% year over year to $2.7 billion in the quarter, driven by stronger net interest incomes, loan fee income and transaction processing revenues.

Its revenue stream seems pretty impressive, evident from its 2013-2018 CAGR of 5.4%, mainly driven by higher net interest incomes and other total income of the company. We believe, the company should retain its revenue momentum in the coming quarters, given its solid market position and attractive core business.
Its Direct Banking Business has been delivering solid results from the past several years. Within this business, the private student loan portfolio has grown significantly from $1 billion in 2010 to nearly $88.2 billion in 2018. For the first three months of 2019, net interest income increased 10% year over year, driven by loan growth and the net interest margin expansion. We expect this segment to continue performing well going forward.

Its soaring card sales volume should also be noted. The company consistently launches products, tailored to suit specific customer needs in order to attract customers. It is also active in forging alliances and partnerships on the back of which, card sales volume expanded on average rate of 4.6% in the last five years (2013-2018), primarily owing to a rise in the number of customers using Discover card.

Investors are also impressed by its strategic capital management through share repurchases and dividend payouts. This further instills investor confidence in the stock.

However, the company has been suffering dependence on debt for a long time. Its long-term debt deteriorated on average 8% rate over the last five years (2013-18). This rising debt level resulted in higher interest expenses that continues to weigh on the company’s margins.

The Zacks Consensus Estimate for current-year earnings is pegged at $8.76, indicating a rise of 12.5% from the prior-year reported number on revenues of $11.43 billion, up 6.7% from the year-ago reported figure.

For 2020, the Zacks Consensus Estimate for earnings stands at $9.54 on $12.08 billion revenues, suggesting a respective 8.9% and 5.7% increase from the year-earlier reported figures.

Shares of this Zacks Rank #3 (Hold) company have gained 5.6% in a year’s time against its industry’s decline of 1.7%.

Stocks to Consider

Investors interested in the same space may take a look at some better-ranked stocks like Enova International, Inc. ENVA, Encore Capital Group Inc ECPG and LexinFintech Holdings Ltd. Sponsored ADR LX. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Enova International provides online financial services. The stock managed to pull off average four-quarter positive surprise of 8.2%. It sports a Zacks Rank #1.

Encore Capital provides debt recovery solutions and related services for consumers. This Zacks Rank #2 company delivered average four-quarter positive surprise of 15.1%.

LexinFintech operates as an online consumer finance platform in the People's Republic of China and it came up with average four-quarter beat of 114%. The stock has a Zacks Rank of 1.

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Discover Financial Services (DFS) : Free Stock Analysis Report
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