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Discover Financial Up 36.1% YTD: Will the Rally Continue?

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Discover Financial Services (DFS - Free Report) seems to have caught investors’ attention, courtesy of its rising revenues and robust card sales volume.

In the first quarter of 2019, the company witnessed a 6.6% expansion in its card sales volume from the prior year. Interest income also shot up by almost 14.3% year over year in the same time frame. The company has been gaining traction from its Direct Banking Business as well.

In a year’s time, this Zacks Rank #3 (Hold) stock has surged 36.1% year to date, outperforming its industry's growth of 30.3%.

Its return on equity — a profitability measure — of 26.4%, higher than the industry's 13.4% average.

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

We expect this momentum to continue as it benefits from the following factors:

Impressive Revenue Stream: Organic growth is a key strength at Discover Financial as reflected in its strong revenue growth story, which registers a CAGR of 5.4% over the last five years (2013-2018). This uptick can mainly be attributable to higher net interest incomes and other total income. The company’s interest income increased from $6.7 billion in 2012 to $10.9 billion in 2018. We believe, the company should retain its healthy revenue trend in the coming quarters, given its solid market position and an attractive core business.

Brisk Direct Banking Business: The company’s Direct banking business has also been running well over the past several years. Within this business, the private student loan portfolio has grown significantly from $1 billion in 2010 to nearly $88.2 billion in 2018. We expect this segment to retain its consistency well going forward.

Soaring Card Sales Volume: Discover Financial is one of the major card issuers in the United States and a leading innovator in the credit card industry. The company continues to launch a slew of products, tailored to suit specific customer needs in order to attract new clients. It is also active in forging alliances and partnerships on the back of which, card sales volume expanded on 4.6% average rate of in the last five years (2013-2018), primarily owing to an increasing number of customers using the Discover card.

We expect these investments in marketing and business development to continue benefiting Discover Financial’s card account growth and card sales volumes in the future.

Steady Capital Management: Discover Financial has implemented several capital-boosting initiatives including equity and debt offerings, which have helped the company achieve a strong capital base. The sturdy capital and cash position facilitate efficient handling of excess capital through acquisitions, share repurchases and dividend payouts. A disciplined capital deployment should instill investors’ confidence in the stock.

Stocks to Consider

Investors interested in the finance sector may consider some better-ranked stocks like Visa Inc. (V - Free Report) , Euronet Worldwide, Inc. (EEFT - Free Report) and Green Dot Corporation (GDOT - Free Report) , each carrying  Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Visa works as a payments technology company worldwide. It pulled off average four-quarter positive surprise of 5.4%.

Euronet provides payment and transaction processing and distribution solutions. It delivered average four-quarter positive surprise of 3.3%.

Green Dot works as a financial technology and bank holding company in the United States. It came up with average four-quarter beat of 17.5%.

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