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Discover Financial Services (DFS)

DFS

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Discover Financial Services' (DFS) third quarter earnings surpassed the Zacks Consensus Estimate and year-ago earnings on the back of revenue growth and reduced charge-offs. Moreover, operating performance of the Payment Services segment was impressive, which contributed to bottom-line growth. Higher transaction and credit card sales volumes as well as record-low delinquency and charge-off rates were the positives.

The introduction of home loan products also boosted revenues apart from diversifying the product portfolio. The company's extensive network, sound capital position, stable ratings, rapidly expanding acceptances and cost-containment initiatives will help accentuate growth over the long term.

Our six-month target price of $48.00 equates to 11.3x our earnings estimate for 2012. Given the annual cash dividend of $0.40, this price target implies an expected total return of 21% over that period. This is consistent with our Outperform recommendation on the shares.

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