Discover Financial Services - Momentum

By Zacks | May 08, 2012 AAA

DFS 050712

Discover
Financial Services (DFS)


Back
in early March, DFS was featured
as a momentum stock due to its stellar performance and relatively
inexpensive valuation.  An improving economic climate here in
the
states and increasing transactional volume globally were primary
motivators.  Recent developments indicate that those
trends may be fading or at least not as apparent as they were in March.

 In
early May, Five Star Equities noted that
credit card spending fell by $5 billion in the first two months of
2012,
compared to the year prior.  What's more
is that consumer spending, which makes up 70% of U.S. GDP has been
rising at a
faster pace as of late, but Americans are charging less on their credit
cards
(according to Five Star). 

These
mixed trends haven't fazed
Discover Financial Services; its stock continues to climb. 
Discover stock has increased over 10% since
last mention.  Is there still room for
DFS to rise?

Consumer Trends Shaky

Discover's own U.S. Spending
Monitor, which is an index that has been tracking daily economic
confidence and
spending habits of nearly 8,200 consumers for over 5 years, climbed 0.2
points
to 96.7, its highest level since October 2007. 
That same index also showed consumer confidence unchanged in April, but
generally flat to positive.

During
the great recession of
2008-09 credit all but froze completely.  The average American
(and
global) consumer went into panic mode shifting from high spending to
extreme
saving.  What is interesting is that despite increasing
concerns about the
U.S. economy and rising gas prices, more consumers reported positive
attitudes
about their personal finances in April.

The
report noted that 27 percent of
respondents said their personal finances are getting better, an
increase of 2
percentage points over March. Feelings that personal finances are
getting worse
remained flat.

1336419583.jpg
Credit/Debit Trends

Visa, which is one of Discovers
competitors reported a 30 percent year over year profit in
Q1. 
They cited strength in credit card usage and here
in the United States and overseas. Visa said American consumers charged
12% more
on their credit cards compared to Q42011. Debit card use grew by 4
percent, the
slowest growth in a year. This may be due to the reduction or
elimination of debit
card rewards programs since October, upon the implementation of the
Durbin
Rule portion of Dodd-Frank, which limits the fees banks can charge
stores for
card transactions.

Just
yesterday, the Federal Reserve
reported that U.S. consumers increased their debt in March by a
seasonally
adjusted $21.3 billion.  This marks the
seventh straight monthly gain in consumer borrowing. The March increase
was the
largest since November 2001, and double the roughly $10 billion gain
expected
by many economists.

Company Description

Discover Financial Services is a
direct banking and payment services company. They operate as both a
bank
holding company and a financial holding company.

Their
Discover card which is
offered through the Discover Network lends revolving credit to
consumers to
spend with merchants that accept their service.  The credit
side also runs
the Goldfish credit card business in the UK. 

In
addition to lending, they also
generate fees from their credit card payments network.  The
PULSE network
(PULSE) generates fees through debit and ATM transactions as well as
electronic
funds transfers.

DFS is
particularly attractive due
to its low P/E ratio of 8.45.  Being that
Discover operates a diverse banking, credit and transactional business,
they may
continue to see upward momentum if the consumer situation continues to
improve.   

Financial Profile &
Earnings
Estimates

DFS is a large-cap (17.78 billion) company that jumped back up to a
Zacks Rank
1 strong buy on April 13th, it has been rated between 2 and 1 since
December
17th, 2011.

They
reported a quarterly sales decrease
of 22% at their last earnings report, but managed to register a 24% EPS
gain in
the same period. Their bottom line has topped analyst estimates for the
last five
quarters.  They have managed to exceed
the Zacks Consensus EPS Estimate by an average of 28.43% over the past
year. 

DFS
is expected to earn $3.97 in
FY2012 according to the Zacks Consensus Estimate and it currently
yielding a 1.2%
dividend.

Of
the 19 analysts who cover DFS,
the consensus is for the company to see a 2.26% earnings contraction in
the current
year (FY2012) and another negative 2.32% in FY2013.  Although
that seems
dismal, it's quite an improvement over estimates from last
quarter. 
Many banking models are still factoring in
quite a bit of risk. 

In
terms of the magnitude of analyst
estimate trends, we are seeing all of the consensus estimates higher
than they
were 30 days ago for the current and next quarter as well as FY2012 and
FY2013.

DFS
is expected to earn 93 cents
when they report on June 21st.

1336419584.jpg
Jared
A Levy is the Senior Equities
Strategist for Zacks.com. He is also the Editor in charge of the
market-beating
Zacks
Whisper Trader Service.

 

 
DISCOVER FIN SV (DFS): Free Stock Analysis Report
 
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