Discover Financial (DFS) Up 202.3% in a Year: More Room to Run?

Discover Financial Services DFS is well-poised for growth owing to shift of payments to the digital mode and its cost-cutting measures.

Over the past 30 days, the stock has witnessed its 2021 and 2022 earnings estimates move north 37.2% and 9.5%, respectively.

The company's return-on-equity stands at 28.9X, way higher than its industry's average of 8X, which reflects its growth potential.

The company reported first-quarter 2021 adjusted earnings of $5.04 per share, beating the Zacks Consensus Estimate of $2.88 by a whopping 75%. Moreover, the bottom line rebounded from the year-ago quarter’s loss of 25 cents per share. Results were driven by a solid credit performance and an impressive growth in sales.

This upside can also be attributed to a solid performance by the company’s Direct Banking business.

As a direct banking and payment services company in the United States, Discover Financial is steadily gaining from its digital transition, primarily led by the COVID-19 pandemic. The company witnessed a solid recovery in card sales, which has been contributing to its overall performance for sometime now.

In the past year, this currently Zacks Rank #1 (Strong Buy) company has gained a whopping 202.9%, outperforming its  industry’s rally of 154.7%.

Other companies in the same space, such as  SLM Corporation SLM, Ally Financial Inc. ALLY and Synchrony Financial SYF have also soared 153.9%, 254.7% and 160% in the same time frame. You can see  the complete list of today’s Zacks #1 Rank stocks here.

Solid improvement in sales trends position the company well for future loan growth. Discover network volume was up 11% year over year on the back of card sales volume in the first quarter. The March quarter witnessed better numbers in travel, restaurants and retail as the economy is resurging.

Discover Financial has been making continuous efforts by teaming up with leading organizations to increase its acceptance worldwide. The leading card issuer company has a network of more than 50 million merchant acceptance locations and 2 million ATM and cash access locations worldwide.

The company also inked a deal with Payments Network Malaysia SdnBhd (PayNet) that will boost acceptance of Discover, Diners Club International and network alliance cardholders in the country. The move is in sync with the company’s aim to expand its presence in the APAC region.

The company’s organic growth contributed to its healthy revenue stream on the back of higher net interest income and other total income. Although the same fell to some extent in the first quarter, we are hopeful that the metric will improve owing to the company’s solid market position, expansion in the global payments business and an attractive core business.

Discover Financial took certain cost-controlling measures in response to the current economic environment. The actions include reducing account acquisition expense, cutting down on brand awareness and consideration activities, and lowering vendor and technology spend. Based on its prudent expense management, the company anticipates expenses (excluding marketing costs) to remain relatively flat year over year this year.

The company’s balance sheet reflects strength. Its net debt-to-capital ratio stands at 1X, lower than the industry's average of 31.5X. Its times interest earned stands at 7.6X, higher than the industry's average of 3.2X. Thus, its solvency position looks strong.

Backed by this tailwind, it resumed its share buyback in January. The board of directors approved a new $1.1-billion share repurchase program, which can be terminated at any time. On the back of a solid financial standing, the company is consistently deploying capital in the form of dividends. Its current dividend yield of 1.5% compares favorably with the industry’s figure of 1.3%.

Further Upside Left?

We believe that the company is well-poised for growth on the back of various initiatives.

The stock carries an impressive VGM Score of B. Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors.  

The Zacks Consensus Estimate for the company’s 2021 earnings indicates an improvement of 257.5% from the year-ago reported figure.

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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.

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