3 Reasons Why You'll Love Discover Financial Services

Discover Financial is a bet on stronger loan growth going forward and increasing earnings in its important credit card business.

Jul 31, 2014 at 1:32PM
G

Source: Company

Discover Financial Services (NYSE:DFS) delighted investors with another solid quarter that saw double-digit increases in its pre-tax, pre-provision and net interest income and solid loan growth. The financial company further convinces with a comparatively low valuation when benchmarked against its immediate credit card peers.

Discover Financial offers traditional banking services such as credit cards, home loans, home equity loans, private student loans and other core banking products such as savings and checking accounts.

In addition, Discover Financial operates PULSE, a leading ATM/debit network, and Discover Network, a secure payments network which facilitates payments for a full range of credit, debit and prepaid cards. Discover Financial currently has a market capitalization of $29 billion and is a formidable force in the credit card and loan business.

1. Solid loan growth
Discover Financial has become a formidable force in the credit card business.

G

Source: Discover Financial Second Quarter Earnings Presentation

The banking firm is one of the largest credit card issuers in the country and has used its strong market position in credit cards to expand into other product groups such as student loans or personal loans.

In the second quarter of fiscal 2014, Discover Financial could present total year-over-year loan growth of 7% and a loan portfolio totaling $65.9 billion.

Almost 80% of total loans are attributable to Discover Financial's card business indicating that the bank will remain highly dependent on this business segment in the future to drive company earnings.

Given the immense size of its card loan portfolio of $52.7 billion in the most recent quarter, investors are likely to see more moderate, yet attractive, growth rates going forward.

Personal loans, on the other hand, represent a much lower percentage of total loans, but exhibited the highest year-over-year growth rate of 26%.

2. Earnings
Discover Financial generally has done a good job in the second quarter. Driven by loan growth and an 11% higher net interest income, the bank also achieved healthy bottom line results: Its pre-tax, pre-provision income, a proxy for sustainable bank earnings, improved 13% year-over-year to $1.38 billion compared to last year's $1.22 billion.

Discover Financial's net income increased 7% while its diluted earnings per share grew even stronger at 13% to $1.35.

The bank's high reliance on the credit card business also raises hopes, that the bank will be able to capitalize on higher consumer spending in an economic upswing in the U.S. going forward.

Credit card players like Discover Financial should be among the major beneficiaries of an increase in discretionary income and higher consumer spending similar to credit card companies like American Express (NYSE:AXP) or Mastercard (NYSE:MA).

3. Valuation
Discover Financial compares very favorably to other credit card-focused financial firms. While most investors concentrate on traditional credit card issuers such as American Express or Mastercard, Discover Financial actually is a much better bet from a valuation point of view.

Its price to book multiple stands at just 2.6x whereas American Express trades at nearly twice this metric.

Mastercard certainly trades in a valuation league of its own with an almost indefensible P/B ratio of 13.5x.

G

The Foolish Bottom Line
I cannot help but like Discover Financial especially after another quarter of strong financial results in its core credit card business. Its outsized exposure to credit cards should serve the company well as consumer spending increases and demand for credit cards and transaction volumes go up.

Moreover, Discover Financial convinces with a comparatively low valuation compared to its credit card peers and should be able to catch up in terms of valuation once its credit card business really takes off.

Risk-free for 30 days: The Motley Fool's flagship service
Tom and David Gardner founded The Motley Fool over 20 years ago with the goal of helping the world invest...better. Their flagship service, Stock Advisor, has helped thousands of investors take control of their financial lives and beat the market. Click here to sign up today.

Kingkarn Amjaroen has no position in any stocks mentioned. The Motley Fool owns shares of Discover Financial Services. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers