We have retained our Neutral recommendation on
Discover Financial Services
). The recommendation is based on its rising expenses and high
competitive pressure, which are expected to weigh on the
positives. This direct banking and payment services company
currently carries a Zacks Rank #3 (Hold).
Discover Financial incurs considerable expenses in order to
compete with other credit card issuers to attract and retain
customers and increase card usage. The company's profits are
largely tapered due to the company's higher-than-expected
advertising and marketing expenditures. Information processing
and communications expenses, professional fees, premises and
equipment and other expenses also increased in 2012, thereby
substantially increasing total non-interest expenses.
Moreover, Discover Financial's competitors in the credit card
business have substantially larger scales of operation, posing
ample risk on the operational front. Companies in the competitive
card business have to offer various incentives and rewards in
order to attract customers.
Discover Financial's rivals have more financial resources than
the company due to larger operating scale, which enables them to
offer better incentives. Thus, Discover Financial is relatively
at a competitive disadvantage, which tends to slow down its
growth in the global market.
Nevertheless, counting on the positives, Discover Financial
has grown to become one of the largest card issuers in the U.S.
and a leading innovator in the credit card industry. Credit card
sales volume reached the milestone of $100 billion in 2011 and
increased further in 2012.
The company regularly forms alliances to boost card
acceptances and expand its network. Discover Financial also
continues to explore healthy opportunities for inorganic and is
working hard to establish a foothold in the international card
Discover Financial reported fourth-quarter 2012 operating
earnings per share of $1.07, lagging the Zacks Consensus Estimate
of $1.13. However, earnings surpassed the year-ago quarter's
earnings of 95 cents per share.
Other Stock to Consider
Although we have a cautious stance on Discover Financial,
other stocks in the financial sector such as
Fidelity National Information Services, Inc.
), which carry a Zacks Rank #2 (Buy), are worth considering.
DISCOVER FIN SV (DFS): Free Stock Analysis
FIDELITY NAT IN (FIS): Free Stock Analysis
FISERV INC (FISV): Free Stock Analysis Report
VISA INC-A (V): Free Stock Analysis Report
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