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Analyst Blog

On May 14, 2013, the shares of Discover Financial Services (DFS - Free Report) reached a 52-week high of $46.62. Strong first-quarter 2013 earnings as well as efficient capital deployment and product launches drove the momentum.

On Apr 23, 2013, Discover Financial reported first-quarter 2013 earnings per share (EPS) of $1.33, surpassing the Zacks Consensus Estimate of $1.12 and year-ago earnings of $1.21. Better than expected results came on the back of revenue growth and improved interest income. Strong operating results in the Direct Banking segment overshadowed the decline in pre-tax income of the Payment Services segment.

Further, Discover Financial’s healthy capital and cash position prompted it to announce a 43% hike in its quarterly cash dividend to 20 cents on Apr 16, 2013. The company also launched a new cloud-based payment service – Ariba Pay – in collaboration with Ariba on May 8.

Moreover, in April, Discover Student Loans, a unit of Discover Financial, introduced two new loan products for law students and for people beginning a health profession residency program or internship. The company plans to expand its market presence through product launches, extension of distribution channels and partnerships.

Further, the valuation of Discover Financial looks fair. The shares are currently trading at an 8.1% premium to the peer group average on a price-to-earnings basis and a 22.8% premium to the peer group average on a price-to-book basis. However, its return on equity of 25.4% is 16.8% higher than the peer group average of 21.8%. The year-to-date return from the stock is 20.8%, above S&P’s return of 15.7%.

Discover Financial currently carries a Zacks Rank #2 (Buy). Other stocks in the financial sector that are worth a look are Credit Acceptance Corp. (CACC - Free Report) , Encore Capital Group, Inc. (ECPG - Free Report) and Regional Management Corp. (RM - Free Report) . All these stocks carry a Zacks Rank #2 (Buy).