Discover Financial's Student Loans, Buybacks Look Good
On Sep 26, 2014, we issued an updated research report on Discover Financial Services (DFS). We believe that the company’s strong student loan portfolio, global expansion, efficient capital management and increased card sales volume position it well for long-term growth. However, we remain concerned about the high expenses, industry competition, lawsuit damages and regulatory challenges faced by the company.
Earlier, this Zacks Rank #2 (Buy) stock reported second-quarter earnings 2014 earnings that were higher than the Zacks Consensus Estimate and the year-ago quarter figure, primarily due to loan growth and share repurchases. Discover Financial’s strong performance was also evident from the double-digit new account growth. Moreover, the rollout of a cash back reward card and announcement of new lower rates for students during the quarter contributed positively as well.
Since its inception, Discover Financial has grown to become one of the major card issuers in the U.S. and a leading innovator in the credit card industry. The company continues to launch products tailored to suit specific customer needs in order to attract new customers. The company’s reduction in interest rate for student loans in the second quarter of 2014 and introduction of an in-school repayment product, aimed to draw in a greater number of students, was successful as private student loan originations increased in the first half of 2014.
Discover Financial is also working hard to establish a foothold in the international card market. In 2012 and 2013, the company initiated the issue of Discover cards outside the U.S. through the expansion of its franchise agreement with Diners Club in the Republic of Ecuador, India, China, Russia, Nigeria and other Middle-Eastern countries.
The company has implemented several capital bolstering initiatives as well. In Apr 2014, it authorized a $3.2 billion share repurchase program. To drive shareholders’ value through share repurchases, Discover Financials intends to buy back shares worth $1.6 billion in the four-quarter period from Mar 31, 2014 to Mar 31, 2015. Moreover, Discover Financial continues to explore healthy opportunities for inorganic growth. Implementation of the new core banking platform is expected to support all the deposit products and is thus likely to take Discover Financial’s customer service to new heights. The accolades it has received this year also clearly reflect its quality services.
Discover Financial’s card sales volume has been witnessing a consistent rise owing to improved consumer spending and wallet share, credit quality trends and new card account. Moreover, Discover Financial’s provision of FICO scores (on the ‘Discover it’ cardholder monthly statements) is expected to attract more customers, thereby generating higher volumes.
On the flip side, Discover Financial incurs considerable expenses in order to compete with other credit card issuers to attract and retain customers and increase card usage. The company’s agreement with the Federal Deposit Insurance Corporation (:FDIC) and Consumer Financial Protection Bureau (:CFPB) in Sep 2012, to refund $200 million to cardholders increased its expenses. Moreover, with the enactment of CFPB’s legislations to address certain concerns associated with the student loan servicing practices that were introduced in Dec 2013, the company’s expenses could rise further.
Further, owing to the various reports issued in 2013 and so far in 2014 by several major retailers regarding unauthorized access to payment card and other data of millions of customers, members of Congress and state legislators have decided to investigate the matter and enact laws to address the issue. If implemented, this can lead to higher costs for Discover Financial.
The Payments Service segment has also been a drag in the past few quarters. The future success of this segment is dependent on the company’s ability to adapt to the technological changes and evolving industry standards, failure of which could cause a decline in revenues.
Other Stocks to Consider
Investors interested in the financial services industry could also consider stocks like Capital One Financial Corporation (COF), Santander Consumer USA Holdings Inc. (SC) and World Acceptance Corp. (WRLD). All these stocks carry a Zacks Rank same as Discover Financial.
Read the Full Research Report on DFS
Read the Full Research Report on COF
Read the Full Research Report on WRLD
Read the Full Research Report on SC
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