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Balanced View on Discover Financial - Analyst Blog

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On May 26, 2014, we issued an updated research report on Discover Financial Services ( DFS ). We believe that the company's continuous product upgrades and alliances, global presence and effective capital management bode well. However, high expenses, a soft Payment Services segment and industry competition remain concerns.

Earlier, Discover Financial reported first-quarter 2014 earnings that exceeded the Zacks Consensus Estimate. However, results compared unfavorably with the year-ago quarter earnings due to decline in both the Direct Banking and Payment Services segments' income.

Since its inception, this Zacks Rank #3 (Hold) stock has emerged to be one of the major card issuers in the U.S. and a leading innovator in the credit card industry. The company continues to launch products suited for specific customer needs in order to attract new customers.

Discover Financial is also working hard to establish a foothold in the international card market. In this respect, the alliance with Corner Bank, a Swiss banking institution in Mar 2014, to form a Diners Club International franchise in Switzerland is expected to be helpful for the company.

Moreover, Discover Financial's capital bolstering initiatives, which include the new share repurchase authorization and increase in dividends helped the company achieve a strong capital base. The company continues to tap opportunities for inorganic growth as well. In this context, the acquisitions of The Student Loan Corporation and Home Loan Center, which have increased Discover Financial's line of banking products, thereby diversifying its product portfolio are worth mentioning.

Furthermore, Discover Financial is the only major credit card issuer providing FICO scores on the 'Discover it' cardholder monthly statements at present. Going forward, this should attract more customers and consequently generating higher volume.

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, Discover Financial's agreement with the Federal Deposit Insurance Corporation (FDIC) and Consumer Financial Protection Bureau (CFPB) adds to its already high expenses.

The Payments Service segment has also been a drag for the past few quarters. The company is expected to lose out on the third-party issuing deal in network partners by mid-2014, which may weigh further on the segment's performance going forward.

Other Stocks to Consider

Better-ranked players in the financial services space, which look attractive at current levels, include Xoom Corp. ( XOOM ), Fidelity National Information Services, Inc. ( FIS ) and Envestnet, Inc. ( ENV ). While Fidelity National and Xoom sport a Zacks Rank #1 (Strong Buy), Envestnet carries a Zacks Rank #2 (Buy).

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DISCOVER FIN SV (DFS): Free Stock Analysis Report

ENVESTNET INC (ENV): Free Stock Analysis Report

FIDELITY NAT IN (FIS): Free Stock Analysis Report

XOOM CORP (XOOM): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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