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Discover Financial (DFS) Up 170.8% in a Year: More Room to Run?

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Discover Financial Services  (DFS - Free Report) is well-poised for growth owing to shift of payments to the digital mode, solid second-quarter earnings and its cost-cutting measures.

Over the past 30 days, the stock has witnessed its 2021 and 2022 earnings estimates move 16.1% and 3.7% north, respectively.

Its return-on-equity (ROE) reflects its growth potential. The trailing 12-month ROE of 46% has not only improved over the years but also compares favorably with the industry average of 24.1%.

In the past year, this currently Zacks Rank #3 (Hold) player has gained a whopping 170.8%, outperforming its industry’s rally of 130.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Other companies in the same space, such as Credit Acceptance Corporation (CACC - Free Report) and Ally Financial Inc. (ALLY - Free Report) have gained 19.4% and 150.1% each while Global Payments Inc. (GPN - Free Report) has lost 2% in the same time frame. All three companies hold a Zacks Rank #2 (Buy) at present.

The consumer loans company reported second-quarter 2021 adjusted earnings of $5.55 per share, beating the Zacks Consensus Estimate of $3.68 by a whopping 50.8%. The bottom line rebounded from the year-ago quarter’s loss of $1.20 per share. Results were driven by marketing investments, growing sales trends and a solid credit performance.

This upside can also be attributed to growth in its Digital Banking and Payment Services businesses. The company had a solid quarter with strong sales trends and new account growth.

As a direct banking and payment services entity in the United States, Discover Financial is steadily gaining from its digital transition, primarily led by the COVID-19 pandemic. The company witnessed a solid recovery in card sales, which has been contributing to its overall performance for sometime now.

Organic growth is a key strength at Discover Financial as reflected in its revenue expansion story. The upside was mainly driven by higher net interest incomes and other total income of the company. We believe, the metric will recover in the upcoming quarters on the back of the company’s solid market position, progress in the global payments business and an attractive core business.

Its balance sheet position remains impressive. Its net debt-to-capital ratio stands at 9.2X, lower than the industry's average of 27.7X. Its times interest earned stands at 12.9X, higher than the industry's average of 10.8X. As of Jun 30, 2021, it had cash and investment securities worth $24.2 billion, much higher than its long-term borrowings of $19.3 billion.

On the back of a solid capital position, it resumed its share buyback plan in January. The board of directors approved a new $2.4-billion share repurchase program, which expires in March 2022.

In the second quarter, the company increased its quarterly dividend from 44 cents to 50 cents per share. This should instill investors’ confidence in the stock.

Although the company witnessed pressure on its sales volumes due to lower spend on travel and retail among others, it is bouncing back from the same, courtesy of a gradual economic recovery and an improved consumer spending. It is witnessing an improvement in categories like retail and restaurants and the trend bodes well for the long haul too.

Further Upside Left?

We believe that the company is well-poised for growth on the back of its various initiatives.

The stock carries a VGM Score of B. Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors.

The Zacks Consensus Estimate for 2021 earnings indicates an improvement of 369.4% from the year-ago reported figure.