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Discover Financial (DFS) Up 10.6% in Past Month: Growth Ahead?

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Discover Financial Services’ (DFS - Free Report) shares have jumped 10.6% in the past month, outperforming the 5.9% increase of the industry, thanks to new account growth and consistently strong credit performance. The company has been gaining from the ongoing economic recovery, which is good for the payment services market and has positioned itself for better returns for the future.

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Headquartered in Riverwoods, IL, Discover Financial is a digital banking and payment services company in the United States. The company offers credit cards, personal, student and home loans as well as multiple deposit products. DFS currently has a market cap of $37.7 billion.

Can It Retain Momentum?

The answer is yes and before we get into the details, let us show you how its estimates for full-year 2021 stand. The Zacks Consensus Estimate for Discover Financial’s 2021 earnings is pegged at $17.65 per share, indicating a 390.3% rise from $3.60 a year ago. The company beat earnings estimates in each of the last four quarters, with an average of 34.7%. The consensus estimate for 2021 revenuesstands at $12 billion, signaling an 8.4% year-over-year rise.

Now let’s delve into what’s driving the Zacks Rank #3 (Hold) stock.

Discover Financial is well poised to capitalize on the resumption of loan growth as the economy keeps recovering from the pandemic. Also, the expectation of Federal Reserve rate hikes this year to control inflation is beneficial for DFS. The continued digitization of payments, primarily led by the COVID-19 pandemic, is benefiting DFS’ business.

The company’s revenues are expected to keep growing in the upcoming quarters on the back of its solid market position, expansion of the global payments business and attractive core business. In the first nine months of the year, card sales of the company increased 28% year over year.

Discover Financial's balance sheet position remains impressive. Its net debt-to-capital ratio stands at 18.2X, lower than the industry's average of 34.1X. As of Sep 30, 2021, DFS had cash and investment securities worth $20.6 billion, much higher than its long-term borrowings of $18.5 billion. Thus, its solvency position looks strong.

The company’s ability to generate cash from operations is impressive. In fact, in the trailing 12-month period, its free cash flow increased 2.9% to $6.1 billion. This reflects DFS’ operating strength.

Risks

Despite the upside potential, there are a few factors that are impeding the stock’s growth lately. Escalating costs and expenses are hurting its bottom line. Also, increasing provision for loan losses is one of the headwinds faced by the company. Nevertheless, we believe that a systematic and strategic plan of action will drive long-term growth.

Stocks to Consider

Some better-ranked players in the Finance sector include Ryan Specialty Group Holdings, Inc. (RYAN - Free Report) , Houlihan Lokey, Inc. (HLI - Free Report) , and Brown & Brown, Inc. (BRO - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Based in Chicago, IL, Ryan Specialty provides numerous specialty products and solutions for insurance brokers, agents, and others. It acts as a wholesale broker and managing underwriter to provide risk management services. Ryan Specialty’s bottom line for the next year is expected to jump 13.6% year over year to $1.22 per share. RYAN has witnessed one upward estimate revision in the past 30 days and no movement in the opposite direction.

Houlihan Lokey — headquartered in Los Angeles, CA — provides multiple financial services to clients all over the world. Its growing footprint in Europe and Asia’s investment banking services field will help HLI boost strategic and shareholder value in the coming days. Rising average transaction fees will help HLI increase corporate finance revenues. The bottom line of Houlihan Lokey for the current year is expected to rise 44.8% year over year to $6.69 per share.

Headquartered in Daytona Beach, FL, Brown & Brown boasts an impressive growth potential driven by organic means and a prudent inorganic story. Its strategic efforts continue to drive commission and fees, and sturdy performance is boosting cash flows. Brown & Brown’s 2022 earnings per share are expected to rise 5.1% year over year to $2.27. It has witnessed one upward estimate revision in the past 30 days versus none in the opposite direction.