I'm no Barbie girl, nor am I living in a material world, but that didn't stop Discover Financial Services (NYSE: DFS ) from following the footsteps of the entire credit services sector and blowing away Wall Street's estimates last night.
Life in plastic -- it's fantastic!
For those of you who thought Discover was the weakest link, think again. Discover reported a 36% jump in first-quarter profits to $1.18 from just $0.84 in the year-ago period. Although net revenue met the Street's consensus figure, Discover's $1.18 per share in profit crushed the $0.94 analysts had been looking for.
These results were fueled by positive aspects all across the board. Credit card usage increased 7%, while delinquencies hit an all-time low. The drop in delinquencies has prevented Discover from needing to set aside as much in loss reserves, which provided the huge boost to its bottom-line profits. Total loss reserves dropped 64% year over year.
And when I say all aspects of its business were strong, I really mean all aspects. The company's student loan division saw double-digit organic growth while personal loans also saw solid growth. Discover ended the year with $56.3 billion in loans, up 9% from the prior year.
I literally couldn't find one thing in this report to nitpick (and for those of you who have become familiar with me over the years, you know I'm a huge nitpicker), which goes to show just how unstoppable the credit services stocks are at the moment.
It's a party, and everyone's invited
In February, Visa (NYSE: V ) reported a 16% jump in profits that easily soared past Wall Street's estimates on the heels of international card use strength. MasterCard (NYSE: MA ) crushed Discover's already bullish figures by reporting a 23% jump in transactions processed in early February. The company also doubled its quarterly dividend.
Prepaid debit card providers are getting in on the act as well. NetSpend Holdings (Nasdaq: NTSP ) reported a direct deposit jump of 20% last month, with gross dollar volume rising by $300 million to $2.8 billion. Even American Express (NYSE: AXP ) caved in to the peer pressure last year by offering a prepaid debit card. The market for prepaid cards grew from $48 billion in 2009 to $65 billion in 2010, so it appears to be a smart move.
I truly refrain from saying that an industry is infallible, but the credit services sector looks like it might be the strongest sector in the market (Apple stockholders, please find it in your hearts to forgive me). The move toward plastic has been so strong and swift, and the rise in credit quality among its customers so pronounced, that I see no reason why Discover or these other four credit service companies wouldn't be considered a long-term buy at these levels.
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