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Why Hold Strategy is Apt for Discover Financial (DFS) Now

Zacks Equity Research

Discover Financial Services DFS is well-poised for growth, given its solid top-line improvement, a strong Direct Banking business and high card sales volume.

Over the past 30 days, the company’s earnings estimates for 2019 and 2020 have been revised 0.1% and 0.2% upward, respectively. This reflects analysts' optimism on the stock.

Its return on equity — a profitability measure — is 26.2%, better than the industry average of 13.3%. This reflects the company’s efficiency in utilizing its shareholders’ funds.

The company also retained investors' favorable sentiments by maintaining its positive surprise trend in three of the last four quarters, the average beat being 0.25%. This definitely vouches for the company’s operational excellence.

It has also been witnessing a solid revenue momentum over the past many years driven by higher net interest incomes and other total income. Given the company’s consistent efforts, we believe, the company will likely retain its revenue momentum in the coming quarters.

Moreover, its sturdy Direct Banking Business has also been performing well over the past several years. Although the segmental performance in the fourth quarter was partially weighed on by increased provision for loan losses and higher operating expenses, the same is, however, expected to bounce back going forward. Within this business, the private student loan portfolio has grown significantly from $1 billion in 2010 to nearly $88.2 billion in 2018.

Notably, Discover Financial’s rising card sales volume is another forte to reckon with. The company is one of the major card issuers in the United States and a leading innovator in the credit card industry. It consistently launched products, tailored to suit specific customer needs for attracting customers. It is also active in forging alliances and partnerships owing to which, card sales volume expanded on average rate of 4.6% in the last five years . We believe that significant investments in marketing and business development will steadily drive Discover Financial’s card account growth and card sales volumes in the future.

Investors are also impressed by the company’s strategic capital management through share repurchases and dividend payouts. It has taken several initiatives to boost its capital base over the past few years. Such a disciplined capital deployment further instills investor confidence in the stock.

However, the company has been suffering high indebtedness for a long time. Its long-term debt burden deteriorated on average 8% rate over the last five years.This escalating debt-level resulted in higher interest expenses that persist to weigh on its desired margin expansion.

Nonetheless, the Zacks Consensus Estimate for the company’s current-year earnings is pegged at $8.65, representing a year-over-year increase of 11% on revenues of $11.36 billion, which is again up 6.1%.For 2020, the estimate for earnings stands at $9.46 on $12.02 billion revenues, translating into a respective 9.4% and 5.8% year-over-year rise.

Shares of this Zacks Rank #3 (Hold) company have rallied 19.9% year to date versus the industry’s decline of 13.9%.


Stocks to Consider

Some better-ranked stocks from the same space like OneMain Holdings, Inc. OMF, SLM Corporation SLM and Enova International, Inc. ENVA, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

OneMain Holdings provides consumer finance plus insurance products and services. The stock managed to pull off average four-quarter earnings surprise of 3.02%.

SLM operates as a saving, planning and paying for college company in the United States. The company delivered average four-quarter positive surprise of 9%.

Enova provides online financial services and came up with average four-quarter beat of 14.7%.

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