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Discover Financial Services (DFS)
the great recession of
2008-09 credit all but froze completely.
The average American (and global) consumer went into panic mode
from high spending to extreme saving.
and credit card companies also
froze their lending practices as they tried to reconfigure their risk
and remained unsure of just how bad defaults on loans and revolving
lines of credit
would turn out to be. At the peak of the
recession, it was hard to tell what banks and credit card companies
like or if they would even be around in a year or two.
the crisis, consumer credit has
been increasing. Revolving credit lines
are on the rise and based on overall data, the US consumer is getting
little bit stronger each week. Debit
card transactions remained fairly steady compared to credit card
in the downturn and Discover generates income from ATM and debit
through its Pulse system.
diverse banking, credit and
transactional business, Discover might just continue to see upward
momentum as consumer strength improves.
Discover Financial Services is a direct banking and payment services
They operate as both a bank holding company and a financial holding
Their “Discover card” which
is offered through the Discover Network lends revolving credit to
spend with merchants that accept their service.
The credit side also runs the Goldfish credit card business in the UK.
In addition to lending, they
also generate fees from their credit card payments network.
The PULSE network (PULSE) generates fees
through debit and ATM transactions as well as electronic funds
On March 1st, the
company posted strong results for FY2011.
DFS increased its market acceptance at more than 380,000 ATMs worldwide
2011, an 8.6% compared to 2010; it’s
already vast network added about 129 direct financial institution
The PULSE segment increased total
transaction volume by 16% year over year to a record 3.8 billion and
dollar volume by 19% annually to $140 billion.
Several analysts including
Zacks have raised their profit targets on the stock since the report.
Zacks current price target stands at $36 for the
financial services company.
DFS is a large-cap (16.16 billion) company that is trading at about 9
(expectations for next quarter) earnings. They became a Zacks
Rank 1 strong buy
on February 15th, but has been between and 2 and 1 rating since
reported a quarterly sales increase
of 28% at their last earnings report and has now topped analyst
the last four quarters; beating the mark by 37 cents in the second
cents in the first quarter, and by 22 cents in the fourth quarter of
income for DFS rose to $649
million ($1.18 per share) vs. $260.6 million (47 cents per share) in
quarter a year prior, which is an increase of 150% on total sales of
billion in FY2011. They are expected to earn $3.40 in FY2012
the Zacks Consensus Estimate.
reported improvements in
several segments and saw Total loans grow 17% from the prior year to a
$57.3 billion. The company purchased an additional $2.4 billion in
student loans in the fourth quarter.
were increased 67% and
last declared a cash quarterly dividend of $0.10 per share of common
payable on Jan. 19, 2012. The company also repurchased 9.6
million shares in the fourth quarter for $227 million, bringing the
repurchased for the program to 18.0 million or $425 million.
Of the 19 analysts who cover DFS,
the consensus is for the company to see a 16% earnings contraction in
current year (FY2012) and roughly flat in FY2013. Many
banking models are
still factoring in quite a bit of risk.
That doesn’t mean shares can’t move higher and remember that DFS is
trading at less than 9 times earnings.
In terms of the magnitude of
analyst estimate trends, we are seeing all of the consensus estimates
than they were 90 days ago for the current and next quarter as well as
DFS is expected to earn 88
cents when they report on March 21st.
Market Performance &
Discovery Financial’s stock has come a long way over the last 18
than doubling in value. For the last
half of 2011, Discover was in a consolidating wedge formation, which
leads to a breakout.
breakout occurred in early
January when the stock broke above its major moving averages and
rallied $7 or
30% in about 2 months time. DFS is
currently above both the 50 and 200 day averages of $27.52 and $25.09
has exceeded the S&P 500’s
performance in the past year by almost 36% and outpaced it by over 14%
past 3 months during its recent rally. The
stock remains in a bullish trend and has maintained its momentum in the
leading the index by about 6%.
A Levy is the
Momentum Stock Strategist for Zacks.com. He is also the Editor in
charge of the
Whisper Trader Service.