We have retained our Neutral recommendation on
Discover Financial Services
) based on the company's fundamental strength, which offsets
headwinds such as rising expenses and competitive pressure.
Discover Financial's card sales volume has been increasing
over the past several years due to higher average spending per
customer, increase in new customers, impact of increased
marketing and broadened merchant acceptance. Moreover, the
company continues to launch new products tailored to specific
customer needs in order to attract new customers.
This Zacks Rank #2 (Buy) company has implemented several
capital bolstering initiatives, including equity and debt
offerings, which have helped it achieve a strong capital base.
Moreover, the strong cash position and outlook influenced
management to increase Discover Financial's dividend by 43% in
Moreover, Discover Financial regularly forms alliances to
boost card acceptances and expand its network. The company is
also working hard to establish a foothold in the international
card market and has already forayed into India, China, Ecuador,
Russia and Nigeria, among others.
However, Discover Financial incurs considerable expenses in
order to compete with other credit card issuers to attract and
retain customers, and increase card usage. Moreover, the
company's competitors in the credit card business have
substantially larger scales of operation, posing ample risk on
the operational front. Not only do the competitors have a
relatively stronger global presence and brand names, but they own
exclusive contracts with many financial institutions as well,
thereby limiting Discover Financial's business opportunities with
Despite these negatives, Discover Financial's earnings remain
strong. The company reported first-quarter 2013 earnings per
share (EPS) of $1.33, surpassing the Zacks Consensus Estimate of
$1.12 as well as the year-ago quarter's earnings of $1.21.
Even in the second quarter of 2013, Discover Financial's EPS
is expected to grow 15.42% year over year. The Zacks Consensus
Estimate for the company's second-quarter earnings stands at
Other Stock to Consider
Other companies worth considering in the financial sector are
Capital One Financial Corp.
) - Zacks Rank #1 (Strong Buy),
World Acceptance Corp.
) - Zacks Rank #2 (Buy) and
Regional Management Corp.
) - Zacks Rank #2 (Buy).
CAPITAL ONE FIN (COF): Free Stock Analysis
DISCOVER FIN SV (DFS): Free Stock Analysis
REGIONAL MANAGE (RM): Free Stock Analysis
WORLD ACCEPTANC (WRLD): Free Stock Analysis
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