Discoverd, and lot yet to be Discovered

Nitesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Discover Financial Services (NYSE: DFS) the provider of banking services in United states operating in Direct Banking as well as Payment Services, is steady with its strategy and business model as it achieved growth in all its leading products. For the fourth quarter its net income was $541 million marked by the growth of 7.5% than the year ago quarter.  It issues Discover card which is third largest credit card brand in United States

Tough Race

In the US, Discover competes primarily with Visa, MasterCard and American Express. Unlike Visa and master card, Discover directly issues its card through its Discover Bank unit.

American Express Company (NYSE: AXP) has its commitment to New Areas of Growth which is a key to American Express's future growth. American Express launched Enterprise Growth in 2010 to help accelerate their progress in developing alternative payments products, reach customers beyond their traditional base and create new revenue opportunities which worked well. As the overall worldwide economy grows American Express will benefit because they have the customer base and infrastructure in place. Further, AXP has a Price-Earnings-Growth ratio of 1.17 which is a very reasonable price to pay for American Express's expected growth. It has dividend Yield of 1.4% 

MasterCard (NYSE: MA) with a market cap of $57.8 billion while VISA (NYSE: V) with a market cap of $78.6 billion is betting on Square, MasterCard is investing in iZettle, the Swedish start-up that launched its card reader product in Germany and the Netherlands and has recently landed in Spain. This gives a thrill to Discover in the days to come.

Future Ahead

Discover’s first checking product, new domestic and global payments partners, and a new core banking system is expected to launch in early 2013. The new credit card product has been tested successfully in select markets and will be launched nationally by the next month. The company had set aside more money for potential loan losses, and spent more on marketing and personnel, than they expected in the latest quarter and hence there per share earnings expectation are on lower end for 2013 and 2014. Further Analysts Henry Coffey Jr. and Calvin Hotrum earlier estimated EPS at $4.5 for 2013 and $4.75 for 2014 which stood revised at $4.50 and $4.60 respectively. Still reduction in EPS estimates doesn’t hinder the growth prospects of Discover.

Number Game

Net income has increased by 15.2% year-over-year on average across the last five quarters. The biggest gain came in the fourth quarter of the last fiscal year, when income climbed 46.6% compared over year earlier quarter. Card sales volume climbed up by 6%. During the quarter, Discover generated handsome return on equity of 23% and returned approximately $451 million of capital to common shareholders through repurchases and dividends. It reported revenue of $513 million, or 95 cents per share, a year earlier and as the year rolled up it showed a growth of 5.45% in its revenue making it to $541million or $1.07 cents a share. As far as loans are considered, private student loans rose by 6%, while personal loans climbed by 24% and its card sales volume increased to $26.5 while credit card loans at the end of the quarter totalled at $49.6 billion.

 Advice

Discover increased dividend pay-out by 40% to 14 cents a share from 10 cents per share payable in Jan 17, 2013. The company has been busy signing deals like deal which Ebay Inc. (NASDAQ: EBAY) in which it is believed Paypal customers will be able to use their accounts at merchants within the Discover payments network, which could be highly beneficial. Further deal with Google (NASDAQ: GOOG) will allow Discover cardholders to access credit on their accounts by using a smart phone with Google Wallet. This could be a powerful profit driver in a few years and will add significant volumes to its payments business. Hence picking up Discover’s share for a longer duration is highly justified.


Niteshag has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and MasterCard. Motley Fool newsletter services recommend American Express Company, eBay, Google, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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