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Discover Financial Services (DFS - Analyst Report) reported its 10th straight quarter with a positive earnings surprise late last month, as third quarter 2012 earnings surpassed the Zacks Consensus Estimate by 17.8%. This Zacks #1 Rank (Strong Buy) has watched most analysts revise their earnings estimates higher in the past week, boosting Zacks Consensus Estimates for this year and next.

Furthermore, with a price-to-earnings (P/E) ratio of just 9.0, this Zacks #1 Rank (Strong Buy) direct banking and payment services company is a true value pick.

Strong Third Quarter Performance

On September 27, Discover Financial Services reported third quarter 2012 earnings of $1.21 per share, beating the Zacks Consensus Estimate by 17.8% and advancing from last year by 2.5%.

Total revenue (net of interest expense) increased 9.8% year over year to $1.96 billion. Net interest income improved 11% to $1.37 billion. Card sales volume advanced 4% from last year.

The quarter saw historic lows for credit card loan delinquencies and net charge-offs. The delinquency rate for loans over 30 days past due was 1.81% and the net charge-off rate was 2.43%.

Provision for loan losses increased 26% year over year to $126 million.

During the reported quarter, Discover Financial Services repurchased 10 million shares for $350 million under its $2 billion share repurchase program.

Positive Earnings Estimate Revisions

Over the last seven days, the Zacks Consensus Estimate for 2012 rose 6.4% to $4.51 as 13 of 17 estimates were revised upward. This represents a year-over-year increase of approximately 11%.

For 2013, the Zacks Consensus Estimate is up 5.1% to $4.36 in the same timeframe, as 13 of 17 estimates moved higher.

Attractive Valuation

Along with a very attractive P/E multiple, Discover Financial Services has a price-to-book (P/B) ratio as low as 2.3 (a P/B ratio under 3.0 and P/E ratio below 15.0 indicate value.)

Moreover, the company has a 1-year return on equity (ROE) of 26.1%, higher than its peer group average of 21.0%.

Based in Riverwoods, Illinois and founded in 1986, Discover Financial Services is a credit card issuing and electronic payment services company in the United States. In March 2009, Discover became a bank holding company under the Bank Holding Company Act of 1956 and a financial holding company under the Gramm-Leach-Bliley Act in connection with its participation in the U.S. Treasury’s Capital Purchase Program. The company offers its products and services with acceptance in more than 185 countries and territories.

With a market capitalization of $20.5 billion and 11,650 employees, it competes with MasterCard Inc. (MA) and Visa Inc. (V), among others.

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