Why Should You Retain Discover Financial in Your Portfolio?

Discover Financial Services DFS is well-poised for growth on the back of rising revenues and cost-cutting measures.

The company is expected to make progress, 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.

Over the past seven days, the stock’s 2020 and 2021 earnings estimates have move north 6.9% and 0.4%, respectively.

Discover Financial’s return-on-equity (ROE) reflects its growth potential. The company’s trailing 12-month ROE of 10.5% not only improved over the years but also compares favorably with the industry average of 4.2%.

Here we discuss the reasons for keeping this currently Zacks Rank #3 (Hold) company in your investment portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Organic growth is a key strength at the company as reflected in its revenue growth story. The upside was mainly driven by higher net interest income and other total income of the company. Interest income of the company saw a CAGR of 8.1% from 2013 to 2019, which remains impressive to investors. Although in the first six months of 2020, the revenues dipped marginally, we believe that the metric will bounce back in the upcoming quarters on the back of the company’s solid market position, expansion in global payments business and attractive core business.

The company took certain cost-controlling initiatives in response to the current volatile economic environment. It is on track to achieve its previously announced $400 million worth cost savings over the second, third and the fourth quarter of 2020. The actions include reducing account acquisition expense, cutting down on brand awareness and consideration activities, and reducing vendor and technology spend. We expect the company to continue performing well on its cost-curbing measures.

Recently, it also tied up with Car IQ, a California-based financial technology startup, to introduce a payment platform for machine-initiated payments starting with the automotive fleets. Fleet vehicles, connected to Car IQ, will now be allowed to pay for services through the Discover Global Network. Thus customers will be able to enjoy a safe and secure transaction mode.

The company's balance sheet position remains impressive. Net debt is 24.5% (compares favorably with the sequential figure of 41.6%) of its total capital, lower than the industry average of 29.1%. As of Jun 30, 2020, it had cash and investment securities worth $27 billion, higher than its long-term borrowings of $11 billion. Thus, its solvency position looks strong.

However, it withdrew its initial guidance for the full year due to the coronavirus impact on global economy.

Price Performance

In past six months, shares of the company have skyrocketed 110.5% compared with its industry’s increase of 68.9%.

The price performance came against other companies’ stock movements in the same space, such as SLM Corporation SLM, Global Payments Inc. GPN and Fiserv, Inc. FISV, which have gained 25.1%, 51.6% and 29.4%, respectively, in the same time frame.

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Fiserv, Inc. (FISV): Free Stock Analysis Report
SLM Corporation (SLM): Free Stock Analysis Report
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Global Payments Inc. (GPN): 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.

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