We have upgraded our recommendation on
Discover Financial Services
(
DFS
) to 'Outperform' from 'Neutral' based on its exceptional card
sales volume, strong balance sheet and rapidly expanding
acceptances. Besides, steady inorganic growth is also a long-term
positive.
Discover reported fourth-quarter earnings per share of 95 cents,
4 cents ahead of the Zacks Consensus Estimate but way ahead of 64
cents recorded in the year-ago quarter. Net income spiked 46.4%
year over year to $508 million from $347 million a year ago.
Discover's credit card sales volume reached an all-time high of
$100 million in 2011 owing to improved consumer spending and credit
quality trends. High card sales coupled with increasing fund
transfers have also contributed to growth in credit card
receivables. Additionally, improved credit trends have led to
substantial releases of credit loss reserves, part of which has
been reinvested for growth operations.
Moreover, a strong cash position and future outlook influenced
management to increase Discover's dividend twice in 2011. Besides,
the proficient cost containment measures aided substantial
reduction in loan loss provisions, improvement in delinquency and
net charge-off rates and moderation in interest expenses. This is
amply reflected in bottom-line growth over the past several
quarters.
Discover continues to explore healthy opportunities for
inorganic growth as well. The acquisition of Student Loan
Corporation ("SLC") from Citibank and HomeLoan Center ("HLC") from
Tree.com Inc.
(
TREE
) expanded the company's private student loan portfolio and added a
residential mortgage component to its direct-to-consumer banking
business.
However, Discover 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 its higher-than-expected advertising and
marketing expenditures.
Moreover, Discover's competitors in the card business such as
MasterCard Incorporated
(
MA
) and
Visa Inc.
(
V
) have substantially larger scales of operation, posing ample risk
on the operational front. Not only do the arch-rivals have
relatively stronger global presence and brand names, they also own
exclusive contracts with many financial institutions, thereby
limiting Discover's business opportunities with such
institutions.
Nevertheless, we believe that the company's extensive network,
sound capital position and cost containment initiatives will help
accentuate growth over the long term. The Zacks Consensus Estimate
for the company's first-quarter 2012 earnings is currently 88 cents
per share, up about 4.2% year over year. For full year 2012,
the Zacks Consensus Estimate stands at $3.39 per share, down
16.6% from 2011.
Currently, Discover carries a Zacks #1 Rank, which translates
into a short-term 'Strong Buy' rating.
DISCOVER FIN SV (
DFS
): Free Stock Analysis Report
MASTERCARD INC (
MA
): Free Stock Analysis Report
TREE.COM INC (
TREE
): Free Stock Analysis Report
VISA INC-A (
V
): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment
Research