On Mar 16, 2015, we issued an updated research report on Discover Financial Services DFS. The company’s extensive student loan portfolio, global expansions, prudent capital management and increased card sales remain long-term growth drivers. However, high-competition in the debit market, weak Payment Services segment, and increased expenses remain headwinds.
Discover Financial reported fourth-quarter 2014 earnings that missed the Zacks Consensus Estimate and decreased year over year on higher loan reserves.
Discover has emerged as one of the major card issuers in the U.S. and a leading innovator in the credit card industry. It recently launched the Discover it Miles Card, a no-annual-fee credit card, to provide uninterrupted service to travelers. Going forward, investments in marketing and changes made in 2014 to simplify reward redemption are expected to generate new card account growth as well as gains from increased wallet share with customers. Discover Financial is also working hard to establish a foothold in the international card market.
Discover Financial has implemented several capital boosting initiatives, including equity and debt offerings, which have helped it achieve a strong capital base. Recently, the company’s planned 16.7% dividend hike and $2.2 billion share repurchase program have been approved by the Board of Governors of the Federal Reserve System. On implementation, this is expected to boost shareholders’ value further.
The company’s inorganic growth story remains compelling. This is reflected by growth in the private student loan portfolio that was boosted by the acquisition of The Student Loan Corporation earlier.
Further, Discover card sales volume has been witnessing consistent progression owing to improved consumer spending and wallet share, credit quality trends and new card account.
However, Discover Financial has to bear considerable expenses in order to compete with other credit card issuers to attract and retain customers and increase card usage. Expenses also increased in 2014 and the anti-money laundering program enhancements, other planned marketing, technology and infrastructure investments and high legal, regulatory and compliance costs are expected to increase operating expenses in 2015 as well.
Moreover, owing to the challenging regulatory environment, the company expects its net charge-offs and delinquency rates and allowance for loan losses to increase in 2015, thereby weighing on net income.
Discover Financial’s Payment Services segment has been a drag over some time. Loss of third-party issuing deal in network partners, increase in expenses along with the challenging debit environment is likely to weigh on the segment’s performance going forward.
Discover Financial currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the finance industry include Enova International, Inc. ENVA, Credit Acceptance Corp. CACC and Santander Consumer USA Holdings Inc. SC. While Enova sports a Zacks Rank #1 (Strong Buy), Credit Acceptance and Santander hold a Zacks Rank #2 (Buy).
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