Discover Financial Upgraded to Buy

Zacks Investment Research upgraded Discover Financial Services (DFS) to a Zacks Rank #2 (Buy) on Jan 25, 2014.

Why the Upgrade?

Discover Financial witnessed upward estimate on the back of solid fourth -quarter 2013 results. Impressive earnings resulted in the Zacks Consensus Estimate for full-year 2014 to rise 1% to $5.12 per share, which translates into a year-over-year growth of 3.2%. Post-earnings, the Zacks Consensus Estimate for full-year 2015 also increased nearly 1% to $5.45 per share (representing a year-over-year rise of 6.5%).

Discover Financial reported fourth-quarter 2013 results on Jan 23, 2014. Operating earnings per share stood at $1.23, surpassing the Zacks Consensus Estimate by 5.1%. Results also improved 16% year over year. Loan growth and share repurchases mainly contributed to the improvement. Additionally, this financial services company delivered positive earnings surprises in 3 out of the last 4 quarters, with an average beat of 9.1%.

Discover Financial’s top line also fared well on the back of loan growth and higher net interest margin in the Direct Banking segment as well as growth in card sales volume. Segment wise, the Direct Banking segment performed well while the Payments Service segment did not show signs of recovery.

Going forward, the collaboration with the FIDO (Fast IDentity Online) Alliance is expected to help the company to secure information and enhance customer satisfaction, thereby bolstering top-line growth further. Moreover, the launch of new franchises in countries like China, Russia and India, launching products like Cashback, home equity installment loans and the initiation of the FICO scores on the “Discover it” cards, strengthen the future prospects of Discover Financial. The long-term growth rate of this stock is 10.5%.

Other Stocks to Consider

Other players in the financial services space which look attractive at current levels, include Fidelity National Information Services, Inc. (FIS), Heartland Payment Systems, Inc. (HPY) and MasterCard Inc. (MA). While Fidelity and Heartland carry a Zacks Rank #1 (Strong Buy), MasterCard shares the same Zacks Rank as Discover Financial.

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