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Discover Financial Continues to Grow on Solid Card Sales

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On Nov 8, we issued an updated research report on Discover Financial Services (DFS - Free Report) .

The company’s third-quarter earnings of $1.56 per share surpassed the Zacks Consensus Estimate by 5.4%. The bottom line also improved 13% on the back of 5% higher revenues, both on a year-over-year basis.

The company’s Direct Banking Business is a major revenue growth driver. Continuous growth in card sales and loans are the two pillars of this segment Continuous growth in card sales and loans strengthen this segment. All three cards of Discover Financial (Discover it, Discover it Miles, and Discover it Secured) continue to gain popularity in the marketplace.

The company is one of the major credit card issuers in the U.S. and is creating a more active card member base than solely relying on fund transfers at acquisitions, thus protecting the loan portfolio during times of lower balance transfers. In the third quarter, the segment continued to outperform with total loan growth of 5% and a 1% increase in total card sales volume, on a year-over-year basis.

The company has put in relentless efforts to solidify its position in the international card market. The company has successfully established its presence in countries like India, China, Russia, Nigeria and the Middle-Eastern countries. In order to bolster its inorganic growth, the company has undertaken several mergers, acquisitions, and strategic alliances. These deals have not only strengthened its global payment network but also restructured its business lines with innovations and technologically advanced initiatives.

Discover Financial’s strong fundamentals continue to support its capital boosting initiatives, both in terms of debt and equity offerings. These initiatives have significantly contributed to the company’s efficient capital deployment. Increase in dividend payments at regular intervals and frequent yet well-planned share repurchases have also cemented investors’ confidence on the stock. During the third quarter, Discover Financial spent nearly $582 million to buy back 10.1 million shares.

However, the company’s Payments Service segment continues to underperform. A previously announced loss of volume from a third-party debit issuer continues to affect this segment’s revenues. The segment’s revenues net of interest expenses for the first nine months of 2016 dropped 4% to $205 million, mainly due to a fall in PULSE volume.

Also, the company faces stiff competition from credit card industry giants like Visa Inc. (V - Free Report) , MasterCard Inc. (MA - Free Report) and American Express Co. (AXP - Free Report) , which might limit its business. As a result, Discover Financial undertakes several marketing and business development initiatives to stay competitive. This in turn escalates expenses for the company. In addition, costs incurred due to several anti-money laundering program enhancements, other planned marketing, technology and infrastructure investments and high legal, regulatory and compliance costs raise concerns.

Zacks Rank

Discover Financial Presently carries Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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