Discover Financial Services (
During the great recession of 2008-09 credit all but froze
completely. The average American (and global) consumer went
into panic mode shifting from high spending to extreme
Banks and credit card companies also froze their lending
practices as they tried to reconfigure their risk models and
remained unsure of just how bad defaults on loans and revolving
lines of credit would turn out to be. At the peak of the
recession, it was hard to tell what banks and credit card companies
would look like or if they would even be around in a year or
Since the crisis, consumer credit has been increasing.
Revolving credit lines are on the rise and based on overall data,
the US consumer is getting just a little bit stronger each
week. Debit card transactions remained fairly steady compared
to credit card transactions in the downturn and Discover generates
income from ATM and debit transactions through its Pulse
With a diverse banking, credit and transactional business,
Discover might just continue to see upward momentum as consumer
Company Description & Developments
Discover Financial Services is a direct banking and payment
services company. They operate as both a bank holding company and a
financial holding company.
Their "Discover card" which is offered through the Discover
Network lends revolving credit to consumers to spend with merchants
that accept their service. The credit side also runs the
Goldfish credit card business in the UK.
In addition to lending, they also generate fees from their
credit card payments network. The PULSE network (PULSE)
generates fees through debit and ATM transactions as well as
electronic funds transfers.
On March 1st, the company posted strong results for
FY2011. DFS increased its market acceptance at more than
380,000 ATMs worldwide in 2011, an 8.6% compared to 2010;
it's already vast network added about 129 direct financial
The PULSE segment increased total transaction volume by 16% year
over year to a record 3.8 billion and grew total dollar volume by
19% annually to $140 billion.
Several analysts including Zacks have raised their profit
targets on the stock since the report. Zacks current price
target stands at $36 for the financial services company.
DFS is a large-cap (16.16 billion) company that is trading at about
9 times forward (expectations for next quarter) earnings.
They became a Zacks Rank 1 strong buy on February 15th, but
has been between and 2 and 1 rating since December 17th, 2011.
They reported a quarterly sales increase of 28% at their last
earnings report and has now topped analyst estimates for the last
four quarters; beating the mark by 37 cents in the second quarter,
31 cents in the first quarter, and by 22 cents in the fourth
quarter of the last fiscal year.
Net income for DFS rose to $649 million ($1.18 per share) vs.
$260.6 million (47 cents per share) in the same quarter a year
prior, which is an increase of 150% on total sales of roughly 8.6
billion in FY2011. They are expected to earn $3.40 in FY2012
according to the Zacks Consensus Estimate.
Discover reported improvements in several segments and saw Total
loans grow 17% from the prior year to a record $57.3 billion. The
company purchased an additional $2.4 billion in private student
loans in the fourth quarter.
Dividends were increased 67% and last declared a cash quarterly
dividend of $0.10 per share of common stock, payable on Jan. 19,
2012. The company also repurchased 9.6 million shares in the
fourth quarter for $227 million, bringing the total shares
repurchased for the program to 18.0 million or $425 million.
Of the 19 analysts who cover DFS, the consensus is for the company
to see a 16% earnings contraction in the current year (FY2012) and
roughly flat in FY2013. Many banking models are still
factoring in quite a bit of risk. That doesn't mean shares
can't move higher and remember that DFS is trading at less than 9
In terms of the magnitude of analyst estimate trends, we are
seeing all of the consensus estimates higher than they were 90 days
ago for the current and next quarter as well as FY2012 and
DFS is expected to earn 88 cents when they report on March
Market Performance & Technicals
Discovery Financial's stock has come a long way over the last 18
months, more than doubling in value. For the last half of
2011, Discover was in a consolidating wedge formation, which
typically leads to a breakout.
That breakout occurred in early January when the stock broke
above its major moving averages and rallied $7 or 30% in about 2
months time. DFS is currently above both the 50 and 200 day
averages of $27.52 and $25.09 respectively.
DFS has exceeded the S&P 500's performance in the past year
by almost 36% and outpaced it by over 14% in the past 3 months
during its recent rally. The stock remains in a bullish trend
and has maintained its momentum in the past month, leading the
index by about 6%.
Jared A Levy is the Momentum Stock Strategist for Zacks.com. He
is also the Editor in charge of the market-beating
Zacks Whisper Trader Service.
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