Discover Financial Services (DFS) has landed on Barron’s “Top Ten Stock Picks for 2016.” A “steady grower,” DFS replaces “sprawling” Bank of America (BAC).
Barron’s like CVS, Discover has trounced the broad market over the long term but sold off recently. It’s down more than 15% this year. Costs rose early in the year in part due to one-time expenses related to anti-money-laundering efforts and other regulatory concerns.
Analysts predict an offsetting decline in expenses next year.
DFS has a 52-week trading range of $50.20 to $66.72 per share. Trading today (956am) at $55.71.
Barron’s further says don’t confuse Discover with a company that’s primarily in the business of running a credit-card network, like Visa (V) and MasterCard (MA). It’s basically a credit-card lender, like Capital One Financial (COF), that runs its own network to gain a competitive advantage.
By saving on network fees, Discover can offer attractive card rewards, including a popular cash-back program. Any card lender can offer cash back, of course, but being too aggressive risks hurting margins. Discover has grown its portfolio of credit-card loans much faster than big banks have in recent years. And it has done so with industry-leading returns on capital.
Rising growth could be on the way. Early this year, Discover went on a marketing spree. Last quarter, it reported its best card growth since 2007. Historically, new-card growth and loan growth have been closely correlated.
In a November note to investors, Morgan Stanley analyst Cheryl Pate predicted accelerating loan growth within six months. Meanwhile, defaults remain low. Shares sell for less than 10 times projected earnings for the next four quarters, down from 12 times at the end of last year. They could rise 20% on a combination of earnings growth and a valuation rebound. The dividend yield is 2%.
DISCOVER NET INCOME
3Q/04: $644 million
4Q/04: $404 million
1Q/05: $586 million
2Q/15: $599 million
3Q/15: $612 million
For data, background and forecasts on Discover: Search CardWeb.com’s CardFlash® Library of more than 58,000 archived articles; Access CardWeb.com’s CardData® for current and historical Performance, Portfolios, Profiles, etc. Visit RAM Research® (ramresearch.com) for quarterly and annual forecasts covering more than 150 metrics. [complimentary or deeply discounted access to CardWeb.com subscribers].
Additional database resources include CardWeb.com’s CardExecs® – comings & goings of payments movers & shakers; CardWeb.com’s CardWatch® – ears & eyes on marketing globally (57K items); and CardWeb.com’s CardPixes® – form & function of card design (7K items).