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We expect banking and payment services company Discover Financial Services (DFS - Analyst Report)) to beat expectations when it reports second quarter 2013 financial results after the closing bell on Jul 23.

Why a Likely Positive Surprise?

Our proven model shows that Discover Financial is likely to beat earnings because it has the right combination of two key ingredients.

Positive Zacks ESP: Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method), which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is at +0.86%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.

Zacks Rank #2 (Buy): Discover Financial currently carries a Zacks Rank #2 (Buy). Note that stocks with Zacks Ranks of #1, #2 and #3 have a significantly higher chance of beating earnings. The sell rated stocks (#4 and #5) should never be considered going into an earnings announcement.

The combination of Discover Financial’s Zacks Rank #2 and ESP of +0.86% makes us very confident in looking for a positive earnings beat on Jul 23.

What is Driving the Better-than-Expected Earnings?

Discover Financial’s measures to boost earnings such as product launches, acquisitions and alliances are expected to lead to a positive earnings surprise in the upcoming quarter. The company inked agreements with Barclaycard Global Payment Acceptance, Japan Credit Bureau, Cadence Bank and Interswitch Limited this year to boost card acceptances and transaction volume.

Discover Financial witnessed an 18.75% surprise in the first quarter of 2013. This was possible due to higher revenues and improved interest income. Increased loans, additional revenues from Discover Home Loans, launched in Jun 2012, and a decline in funding costs boosted the earnings of the Direct Banking segment.

Other Stocks to Consider

Discover Financial is not the only firm looking up this earnings season. We also see likely earnings beats coming from these 3 industry peers:

Capital One Financial Corp. (COF - Analyst Report) – Earnings ESP of +0.59% and Zacks Rank #2 (Buy)

Visa Inc. (V - Analyst Report) – Earnings ESP of +0.56% and Zacks Rank #2 (Buy)

Heartland Payment Systems, Inc. (HPY - Snapshot Report) – Earnings ESP of +2.00% and Zacks Rank #1 (Strong Buy)

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