Discover Financial Poised For Growth Despite High Costs

On Jul 12, 2016, we issued an updated research report on Discover Financial Services (NYSE:DFS) .

Discover Financial is one of the biggest direct banking and payment services companies in the U.S. The insurer is also one of the major card issuers in the nation. The company has been one of the leading innovators in the credit card industry since its inception and continues to introduce changes in its product range to cater to specific customer needs and attract new customers.

The insurer has joined forces with companies like Apple Inc. (NASDAQ:AAPL) , Alphabet (NASDAQ:GOOGL) Inc. (NASDAQ:GOOG) , eBay Inc (NASDAQ:EBAY). and Obopay to draw in the technology-friendly young crowd. Collaborations like these have also helped to expand the company’s client base domestically.

The company has also formed partnerships to expand its Discover and Diners Club cards acceptance worldwide. Discover Financial’s focus on smoothening PIN debit transactions, along with boosting ATM transaction volume and better point of sale experience, helped it deliver value for cardholders across globe. Its recent launch of “Quick Chip” is in sync with this strategy.

Discover Financial also remains focused on expanding its operations across the international card market.

Moreover, the acquisition of The Student Loan Corporation helped the company enhancing its line of banking products, thereby diversifying its product portfolio. This also complemented the company’s long-term goal of bolstering its private student loan portfolio. The core banking platform, once implemented, will support Discover Financial’s deposit products and take its customer service to new heights. Also, the divestiture of Home Loans business and mortgage origination businesses should help Discover Financial focus on core capabilities.

These apart, significant investments in marketing and business development are likely to benefit Discover Financial’s card account growth card sales volumes in the future,

Discover Financial has implemented several capital-boosting initiatives, including equity and debt offerings. These have helped the company achieve a strong capital base. Recently, Discover received approval from the Federal Reserve to implement its new capital plan over the next four quarters. The capital plan comprised 7% dividend hike and share buybacks worth $1.95 billion.

However, Discover Financial is likely to witness an increase in expenses due to its substantially high advertising and marketing expenditures. Concurrently, the anti-money laundering program enhancements, other planned marketing, technology and infrastructure investments and high legal, regulatory and compliance costs are likely to increase operating costs, going forward.

Also, the company’s Payments Service segment has been underperforming over the past few quarters. Intense competition is another headwind.

Discover Financial is set to report second-quarter 2016 results on Jul 19. The Zacks Consensus Estimate for the second quarter is currently pegged at $1.43, which translates to a year-over-year increase of 7.4%. However, our proven model does not conclusively show that the company will beat earnings this quarter. This is because the company carries a Zacks Rank #3 (Hold) but an Earnings ESP of -4.20% makes surprise prediction difficult.

Stocks to Consider

Some better-ranked stocks from the Finance sector are Armada Hoffler Properties, Inc. (NYSE:AHH) , Assurant Inc (NYSE:AIZ) and Aon Plc (NYSE:AON) . Each of these holds a Zacks Rank #2 (Buy).

APPLE INC (AAPL): Free Stock Analysis Report

DISCOVER FIN SV (DFS): Free Stock Analysis Report

AON PLC (AON): Free Stock Analysis Report

ASSURANT INC (AIZ): Free Stock Analysis Report

ARMADA HOFFLER (AHH): Free Stock Analysis Report

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