Yahoo Finance Here's Why You Should Retain Discover Financial (DFS) for Now
Discover Financial Services’ DFS improving net interest margin, growing top line, higher loan growth, digital transformation, and efforts to boost shareholder value make it worth retaining in one’s portfolio.
Discover Financial is a leading digital banking and payment services company in the United States. It offers products like credit cards and personal, student and home loans, as well as deposit products with acceptance in more than 185 countries and territories.
Zacks Rank & Price Performance
DFS currently carries a Zacks Rank #3 (Hold). In the year-to-date period, the stock has gained 0.8% compared with the industry’s growth of 0.4%.
Image Source: Zacks Investment Research
Return on Equity (ROE)
The ROE of Discover Financial of 31.3% is way higher than the industry average of 13.9%. This reflects its efficiency in utilizing shareholders’ funds.
2023 Estimates & Surprise History
The Zacks Consensus Estimate for DFS’s 2023 earnings is pegged at $13.38 per share. The same for 2023 revenues is pegged at $15.6 billion, suggesting a 16.7% increase from the year-ago reported figure.
The company beat earnings estimates in two of the last four quarters and missed on the other two occasions, the average surprise being 0.2%.
Tailwinds
Discover Financial has witnessed consistent and significant revenue growth for the past few years. Its total revenues increased 29% to $3.8 billion in the first quarter of 2023 due to higher net interest income, continued receivables growth and improving non-interest income.
As Fed continues to keep a high-interest rate environment to battle inflation, DFS’s top line is expected to grow further. It is to be seen whether the company can sustain its high net interest margin in the future. Discover Financial expects the net interest margin to be modestly higher in 2023 than 11.04% at 2022-end.
Non-interest income contributed 16.5% to total revenues in the first quarter of 2023. The company also earns through net discount, interchange and loan fees apart from interest income. This metric grew 10% in the digital banking business due to a higher volume of late payments and improved discount and interchange revenues. This figure is expected to rise further as the loan is expected to grow in the mid-teens for 2023.
The company’s Digital Banking segment accounted for the majority of revenues in the first quarter. It is expected to witness growth accompanied by further moderation in payment rates. Non-card products in the Digital Banking segment include loans provided to individuals through organic student loans, personal loans and credit card loans. DFS’s appealing value proposition and disciplined marketing approach position it well for growth along with strong consumer demand. Improved transaction processing revenues from higher PULSE and Diners Club volume should provide an impetus to the Payment Services segment.
The company manages its excess capital well through share repurchases and debt repayment. It bought back shares worth $1.2 billion in the first quarter. It also increased its quarterly dividend to 70 cents per share in 2023. Hence, Discover Financial is a good option for an investor looking for returns in the form of dividends.
Key Concerns
There are a few factors that have been impeding the stock’s growth lately.
Rising costs can trim its margins. DFS’s total expenses rose 22% in the first quarter due to higher employee compensation, benefits and marketing expenses.
Discover Financial’s rising provision for loan losses undermines its growth potential. It rose more than seven-fold year over year, reflecting high expectations of bad loans in the future. Nevertheless, we believe that a systematic and strategic plan of action will drive growth in the long term.
Stocks to Consider
Some better-ranked stocks from the Consumer Loans space are EZCORP, Inc. EZPW, PROG Holdings, Inc. PRG and Open Lending Corporation LPRO. EZCORP sports a Zacks Rank #1 (Strong Buy), while PROG Holdings and Open Lending Corporation carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for EZCORP 2023 revenues indicates 15.6% year-over-year growth. The consensus mark for 2024 earnings suggests 13.3% year-over-year growth.
The bottom line of EZPW outpaced the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 71.7%.
The Zacks Consensus Estimate for PROG Holdings 2024 revenues indicates 1.7% year-over-year growth. The consensus mark for 2024 earnings suggests 6.3% year-over-year growth.
The bottom line of PRG outpaced the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 27.5%.
The Zacks Consensus Estimate for LPRO 2024 earnings indicates 30.8% year-over-year growth. The consensus mark for 2024 earnings has moved 9.1% north in the past 30 days.
The Zacks Consensus Estimate for LPRO 2024 revenues indicates 7.6% year-over-year growth.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Discover Financial Services (DFS) : Free Stock Analysis Report
EZCORP, Inc. (EZPW) : Free Stock Analysis Report
Open Lending Corporation (LPRO) : Free Stock Analysis Report
Aaron's Holdings Company, Inc. (PRG) : Free Stock Analysis Report
