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Should You Hold Discover Financial (DFS) Stock for Now?

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Discover Financial Services (DFS - Free Report) is well poised to grow on the back of digital transformation efforts, global expansions, and higher travel and entertainment spending. Its solid cash flow generating ability also bodes well. However, rising costs can reduce its margin.

Discover Financial — with a market cap of $25.6 billion — is a digital banking and payment services company. The company offers credit cards, personal, student and home loans, as well as deposit products. Based in Riverwoods, IL, DFS has a major global presence.

Courtesy of solid prospects, this currently Zacks Rank #3 (Hold) stock is worth holding on to at the moment.

Trend in Estimates

The Zacks Consensus Estimate for Discover Financial’s 2022 earnings is pegged at $15.33 per share, which has witnessed two upward revisions in the past 30 days against one in the opposite direction. DFS’ earnings beat estimates in each of the last four quarters, the average being 7%.

Furthermore, the consensus mark for revenues is $12.9 billion for 2022, indicating a 6.9% rise from the year-ago reported figure.

Key Drivers

Discover Financial’s digital transformation efforts are praiseworthy. Besides using in-house resources, it frequently resorts to third-party vendors to pursue technology advancements related to cloud, telecommunications, hardware and operating systems. These digital transformation efforts seem to be necessary to stay abreast with the growing digital trend. It launched the new Advanced Analytics Resource Center (AARC@606) program, which is expected to strengthen Discover Financial’s data and analytics wing and boost in-house resources.

Improving consumer spending, despite inflationary pressure, will buoy DFS’ payment metrics. With the coming holiday season, payment volumes are expected to go up, leading to increased revenues. A rising net interest income will also keep boosting its Digital Banking Segment results. Net interest income rose 14% year over year to $2,610 million in the second quarter on the back of improved average receivables and expanded net interest margin.

Discover Financial’s strong cash flow generating abilities are major positives. In the trailing 12-month period, net cash from operations increased 4.8% to $6.3 billion. It came up with free cash flow of $6.1 billion during this period, indicating a 4.9% jump. Its cash flow enables it to take actions to boost shareholder value. In April 2022, the company increased its quarterly dividend by 20% to 60 cents per share. (Check DFS’ dividend history here.)

The company’s return on equity (ROE) indicates its massive growth potential. Its trailing 12-month ROE of 36.4% compares favorably with the industry average of 19.8%. Its 2022 outlook instills investors’ confidence in the stock. DFS expects loan growth to be in the low teens, up from the prior estimate of high single digits.

The average net charge-off rate is projected in the range of 1.9-2.1% compared with the prior outlook of 2.2-2.4%. The net interest margin is also estimated to witness improvement within 5-15 bps when compared with the first-quarter 2022 figure.

Key Concerns

There are a few factors that are impeding the stock’s growth lately.

Increasing costs are eating into the company’s profits. To compete with other credit card issuers, attract and retain customers and increase card usage, it incurs a considerable amount of expenses. Throughout 2021, total operating expenses jumped 6% to $4,805 million. In the first half of 2022, the metric increased 2% year over year to $1.1 billion. Rising costs can affect its bottom line.

The growing competition in the payments market can be troubling for the company. Emerging payment firms with significant growth potential are rapidly capturing markets. Nevertheless, we believe that a systematic and strategic plan of action will drive its long-term growth.

Stocks to Consider

Some better-ranked stocks in the broader finance space are CI Financial Corp. , Owl Rock Capital Corporation (ORCC - Free Report) and Primis Financial Corp. (FRST - Free Report) , each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Based in Toronto, CI Financial is a leading asset management holding company. The Zacks Consensus Estimate for CIXX’s 2022 earnings has increased 1.2% in the past 60 days.

Headquartered in New York, Owl Rock Capital is a business development company. The Zacks Consensus Estimate for ORCC’s 2022 earnings indicates a 6.4% year-over-year increase.

Based in McLean, VA, Primis Financial offers multiple financial services to businesses and individuals. The Zacks Consensus Estimate for FRST’s 2022 earnings has improved 8.8% in the past 60 days.

See More Zacks Research for These Tickers

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Discover Financial Services (DFS) - free report >>

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Primis Financial Corp. (FRST) - free report >>

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