Why is Hold Strategy Apt for Discover Financial (DFS) Now?

Discover Financial Services DFS is well poised for growth on the back of rising revenues and solid card sales volume.

Over the past 30 days, its 2019 and 2020 estimates have moved 2.9% and 0.9% north, respectively, year over year. This, in turn, reflects analysts' optimism on the stock.

Its return on equity — a profitability measure — is 26.9%, better than the industry average of 12.9%. This echoes the company’s efficiency in utilizing its shareholders’ funds.

The company is well-placed for growth, evident from its favorable 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.

It also retained investors' favorable sentiments by maintaining its positive surprise trend in three of the last four quarters, the average beat being 3.7%. This underscores the company’s operational excellence.

It recently delivered second-quarter earnings of $2.32 per share, beating the Zacks Consensus Estimate by 10%. Moreover, the bottom line improved 21.5% year over year on higher revenues. Moreover, its revenues, net of interest expenses, increased 9.6% year over year to $2.8 billion, driven by higher net interest income and the company’s other total income.

Its revenue stream seems pretty impressive, clear from its 2013-2018 CAGR of 5.4%, mainly driven by higher net interest incomes and other total income. We believe, the company should keep its revenue momentum intact in the coming quarters, given its solid market position and attractive core business.

Its Direct Banking Business has been delivering solid results from the past several years. Within this business, the private student loan portfolio has grown significantly from $1 billion in 2010 to nearly $88.2 billion in 2018. We expect this segment to continue performing well going forward.

Its soaring card sales volume is also impressive. The company consistently launches products, designed to suit specific customer needs in order to attract more clients. It is also active in forging alliances and partnerships on the back of which, card sales volume expanded on average rate of 4.6% in the last five years (2013-2018), primarily owing to customer wins using Discover card. On the back of high consumer spending, the metric rose 6% year over year in the first six months of 2019.

Investors are also encouraged by the company’s strategic capital management through share repurchases and dividend payouts. This further instills their confidence in the stock.

However, the company has been enduring dependence on debt for a long time. Its long-term debt deteriorated on average 8% rate over the last five years (2013-18). This rising debt level resulted in higher interest expenses that weigh on the company’s margins.

The Zacks Consensus Estimate for current-year earnings is pegged at $9.02, indicating a rise of 15.8% from the prior-year reported number on revenues of $11.46 billion, up 6.9% from the year-ago reported figure.

For 2020, the Zacks Consensus Estimate for earnings stands at $9.58 on $12.02 billion revenues, suggesting a respective 6.1% and 4.9% increase from the year-earlier reported figures.

Shares of this Zacks Rank #3 (Hold) company have gained 2% in a year’s time against its industry’s decline of 6.6%.

Stocks to Consider

Investors interested in the finance sector may consider some better-ranked stocks like Visa Inc. V, Cardtronics PLC CATM and PayPal Holdings, Inc. PYPL. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Visa works as a payments technology company worldwide. It pulled off average four-quarter positive surprise of 3.4% and has a Zacks Rank #2 (Buy).

Cardtronics offers automated consumer financial services through its network of automated teller machines and multi-purpose financial services kiosks. The company came up with average four-quarter beat of 37.5% and sports a Zacks Rank #1.

PayPal works as a technology platform and digital payments company. It delivered average four-quarter positive surprise of 10.4% and carries a Zacks Rank of 2.

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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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