We have retained our Neutral recommendation on
Discover Financial Services
) following mixed third quarter results. This direct banking and
payments services company carries a Zacks Rank #3 (Hold).
Why the Reiteration?
Although Discover Financial's operating earnings of $1.20 per
share for the third quarter of 2013 were in line with the Zacks
Consensus Estimate, results declined from the year-ago earnings
of $1.24 per share. Revenues, however, fared well on both counts.
Discover Financial has been launching new and innovative products
to cater to the growing demand in the payments industry. The
introduction of the Discover it card, Discover Cashback
CheckingSM and three new loan products for law students so far in
2013 are worth mentioning. Further, the lowering of its fixed
interest rate for student loans is drawing in a greater number of
students. In fact, higher volumes from private and student loans
are making up for the non-existence of the CitiAssist brand,
which was responsible for the majority of volume for Discover
Financial in 2012.
These efforts along with expansion in the international card
market should be accretive to the top line going forward. The
acquisition of Diners Club Italy and its wholly-owned subsidiary
Dinit and the alliance with Vietnam-based Smartlink Card Service
JSC so far in 2013 are worth mentioning in this regard. Strong
inorganic growth potential and efficient capital management of
Discover Financial also pave the way for this stock to retain
On the tepid side, higher expenses and a weak Payments Services
segment are concerns that keep us cautious about Discover
Financial. Also, the adverse impact of currency fluctuations is
weighing on Diners volume. Moreover, the dynamic debit
environment and fragile economic environment in Europe are
expected to slow down the rate of new deals signed in the
industry, thereby softening the volumes outlook for the Payments
Although Discover Financial has a large cash balance, payments
associated with the company's agreement with the Federal Deposit
Insurance Corporation (FDIC) and Consumer Financial Protection
Bureau (CFPB), added to its already high expenses. Also the net
interest margin has been a drag and with the decline in credit
card yield and addition of lower rate student loans, margin is
likely to fall further.
Other Stocks to Consider
Some better-ranked stocks within the financial services sector
Global Payments Inc.
). While Qiwi carries a Zacks Rank #1 (Strong Buy), Global
Payments and Xoom carry a Zacks Rank #2 (Buy).
DISCOVER FIN SV (DFS): Free Stock Analysis
GLOBAL PAYMENTS (GPN): Free Stock Analysis
QIWI PLC-ADR (QIWI): Free Stock Analysis
XOOM CORP (XOOM): Free Stock Analysis Report
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