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Tickers in this Article: DFS, MA, V, AXP, COF, USB, C
Whether or not the recent news that recession "officially" ended a year ago has any meaning or not, it is hard to argue that improving consumer credit trends are not a positive for the economy. When reviewing Discover Financial Services' (NYSE:DFS) August quarter earnings announcement, there are definitely some encouraging signs of improvement.

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The Quarter that Was
The number four credit card company - behind Mastercard (NYSE:MA), Visa (NYSE:V) and American Express (NYSE:AXP) - Discover, announced a solid earnings beat for its fiscal third quarter. Earnings were up 73% for the period, handily beating the consensus estimate. Transaction volume increased about 7% in the quarter, an interesting metric for both consumer spending and the company's relative market share.

Although adjusted net interest income fell about 10%, charge-offs dropped more than 16% from the year-ago period and the charge-off rate improved 122 basis points annually and 79 basis points sequentially. With better credit trends, the company released $187 million in loss reserves, providing about 10 cents of earnings leverage and basically explaining the company's beat relative to consensus.

An Opportunistic Deal
As Discover operates a closed-loop model (like American Express and different than Visa/Mastercard), these credit trends matter both for good and for ill. Whereas Visa and Mastercard depend upon transaction volume (and credit quality is a risk taken by issuers like Capital One (NYSE:COF) or U.S. Bancorp (NYSE:USB)), Discover has to manage both sides of the equation.

In a roundabout way, that seems to be working in the company's favor right now. Discover has withstood the credit crisis in pretty solid shape and has a pretty strong capital position. That has given the company freedom to be opportunistic about business expansion opportunities. The most recent example was last week's decision to acquire Student Loan Corporation (NYSE:STU) from Citigroup (NYSE:C) for $600 million in cash (before an expected $150 million adjustment). This accretive deal brings with it over $4 billion in private student loans, most of which are covered by insurance and/or indemnified by Citi - further expanding the company's non-credit card business.

The Bottom Line
Discover's stock does not look expensive at this point, and should be a leveraged play on future recoveries in consumer credit and consumer spending. More than half of the analysts covering Discover do have it as a "Buy" or "Strong Buy" (with 8 "Neutral/Hold"), though, and that suggests that there has already been plenty of attention given to this name and its prospects. Still, an attractively-priced stock is a positive, no matter how many other analysts have figured it out, so investors looking to play ongoing improvements in consumer credit, as well as a relatively healthy financial company with the ammunition to make selective deals, could do worse than to check out Discover Financial Services. (To learn more, see Investing In Credit Card Companies.)

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