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Analyst Blog

On Jul 8, 2013, the shares of Discover Financial Services (DFS - Analyst Report) reached a new 52-week high of $50.74, driven by the fundamental strength of the company. This Zacks Rank #2 (Buy) company witnessed a positive earnings surprise of 18.75% in the first quarter of 2013.

Discover Financial follows an inorganic route to fortify its growth profile. The company regularly announces acquisitions and alliances to expand its business and boost earnings. So far in 2013, the company inked agreements with Barclaycard Global Payment Acceptance, Japan Credit Bureau, Cadence Bank and Nigeria-based Interswitch Limited to boost card acceptances and transaction volume.

Discover Financial also reduced its fixed rate on student loans to attract more students, thus boosting the income of the Direct Banking segment. The company continues to launch new products tailored to specific customer needs in order to attract new customers.

Further, Discover Financial has implemented several capital bolstering initiatives, including equity and debt offerings, which have helped the company achieve a strong capital base. The healthy capital and cash position facilitates efficient deployment of excess capital.

The valuation of Discover Financial looks fair. The shares are currently trading at an 11.2% premium to the peer group average on a forward price-to-earnings basis and a 21.4% premium to the peer group average on a price-to-book basis. However, its return on equity is 16.5% higher than the peer group average. Further, the year to date return from the stock is 30.1%, above S&P’s return of 15.0%.  

Some other companies in the financial sector that are doing well and are worth a look are Capital One Financial Corp. (COF - Analyst Report), World Acceptance Corp. (WRLD - Snapshot Report) and Regional Management Corp. (RM - Snapshot Report). All these companies carry a Zacks Rank #2 (Buy).

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