Discover Financial Faces a Tough 2012

With 2012 just beginning, now's a smart time to gauge how the stocks you're interested in are likely to do this year and beyond. By knowing what stock analysts and fellow investors expect from a stock, you'll be smarter about whether you should buy it for your portfolio -- or sell it if you already own it.

Today, let's take a look at Discover Financial (NYSE: DFS  ) . Discover is in the ultra-competitive credit card business, having innovated in the industry with its cashback feature more than 20 years ago. But will the company be able to keep up with mobile payments and other new advances? Below, I'll take a closer look at what people expect from Discover Financial and its rivals.

Forecasts on Discover Financial

Median Target Stock Price $30
Fiscal 2012 EPS Estimate               $3.34
Fiscal 2013 EPS Estimate $3.35
Expected Annual Earnings Growth, Next 5 Years 10.5%
Forward P/E 8
CAPS Rating ***

Source: Yahoo! Finance.

How will Discover Financial perform in 2012?
Analysts have mixed feelings about Discover. The target price for the stock is only around 10% higher than current levels, and earnings are seen remaining stagnant over the next year or two. Longer term, though, earnings growth is expected to pick up. Motley Fool CAPS members share that ambivalence with a neutral three-star rating.

Discover flies beneath the radar of most people following the credit card industry. Visa (NYSE: V  ) claims the status as the largest retail electronic payments network in the world, with nearly 1.9 billion cards issued in as of the company's latest annual report. MasterCard (NYSE: MA  ) comes in second with 975 million cards. But with only 56 million cards issued, Discover can only manage to reach the No. 5 spot.

But things are looking up for the company. In the past year, Discover reported just $2.1 billion in net charge-offs, compared to $3.8 billion in 2010. Because Discover takes on credit risk, it acts like a hybrid between a card network and an issuing bank. That combination hasn't done any favors to fellow card issuer Bank of America (NYSE: BAC  ) , which has struggled over the past year as it faces challenges throughout its banking services business. But although credit risk has been a liability for Discover and other card issuers in previous years, it should push the stock upward if the latest economic upturn continues.

The interesting question is how Discover will respond to big changes in the industry. Although Discover offers debit and prepaid cards, they haven't gotten the same attention as similar offerings from Visa and MasterCard. Moreover, with smartphone-based payment systems moving forward and potentially changing the entire landscape for credit cards, Discover needs to keep up. Discover is making some of the right moves, joining American Express (NYSE: AXP  ) alongside Visa and MasterCard in the Isis network for mobile payments.

With banking, credit cards, and a range of other financial services, Discover needs to find better ways to differentiate itself from the crowd. But with plenty of room for growth, 2012 might be the year Discover can make a big move forward. It'll just take a lot of work.

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Click here to add Discover Financial to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Mastercard and Bank of America. Motley Fool newsletter services have recommended buying shares of Visa and writing a covered strangle position in American Express. 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 Fool has a disclosure policy.


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  • Report this Comment On January 19, 2012, at 4:41 PM, InvestWhatWorks wrote:

    "Discover is making some of the right moves, joining American Express alongside Visa and MasterCard in the Isis network for mobile payments."

    Not that it matters too much who was first or not, but:

    The way you wrote that, you make it seem like Discover joined Isis later after everybody else. Discover Financial was part of Isis from the beginning; working from the start at building the Isis mobile payment network. American Express, Visa and MasterCard followed Discover and joined the Isis about a year or so later.

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