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We expect the direct banking and payment services company Discover Financial Services Inc. (DFS - Analyst Report) to beat expectations when it reports third quarter 2013 results on Oct 21.

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: Earnings Surprise Prediction or Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is at 1.68%. This is a meaningful and leading indicator of a likely positive earnings surprise for shares.

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 (Buy) and 1.68% ESP makes us very confident in looking for a positive earnings beat on Oct 21.

What is Driving the Better Than Expected Earnings?

Curbing interest rates on student loans, closing the acquisition of Home Loan Center and business expansions through alliances with EMVCo and Paydiant are expected to aid Discover Financial’s earnings in the upcoming quarter. Also the launch of Home Equity Loans to bridge the gap between its personal and home loans is expected to drive better earnings in the upcoming quarter.

Discover Financial posted earnings surprise in the last two quarter with an average beat of 11.1% aided by growth in card sales volume. A lower share count due to share repurchase activities also aided the upside.

Other Stocks to Consider

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

World Acceptance Corp. (WRLD - Snapshot Report), Earnings ESP of +2.19% and Zacks Rank #1 (Strong Buy)

Capital One Financial Corp. (COF - Analyst Report), Earnings ESP of +5.71% and Zacks Rank #2 (Buy)

American Express Company (AXP - Analyst Report), Earnings ESP of +0.82% and Zacks Rank #2 (Buy)

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