Shares in Discover Financial Services (NYSE:DFS) rallied sharply Thursday after the credit-card company’s quarterly results easily topped Wall Street’s forecast, putting the stock’s gains at more than 60% year-to-date.
And the stock still looks like a bargain.
Pretty much everything tied to credit cards and payment processors is going gangbusters this year, but even by those lofty standards, Discover stands out.
Shares are up more than 60% for the year-t0-date, making it by far and away InvestorPlace’s top stock pick (even if we didn’t let it into the competition for 10 Best Stocks of 2012.)
Like a lot of “boring” old lending in the retail banking business, Discover is getting a heck of a tailwind from loan growth and improved credit quality. After years of retrenching — if not outright hunkering down — Americans’ personal balance sheets are looking better. They’re borrowing a bit more and paying their bills on time.
That has been a boon to Discover, which keeps exceeding analysts’ expectations.
For the most recent period, earnings per share came to $1.21, beating the Street by a whopping 18 cents a share. The company has now clobbered earnings estimates in eight of its last nine quarters, according to Thomson Reuters data.
Revenue also topped forecasts, beating the Street for a third consecutive quarter (and for the seventh time in the past nine reporting periods.)
Where most credit-card companies are struggling to add customers, Discover has been boosting its portfolio. At the same time, late payments and defaults are hitting record lows. Indeed, Discover is performing so well, some analysts are wondering if it has become a potential acquisition target. (Rumors like that are pretty much always good for company’s stock price.)
It also hasn’t hurt that Discover is expanding its reach. The company is launching a mortgage business (an apparently canny move, given how much record-low rates are boosting mortgage and refinance activity), and recently inked a deal with eBay’s (NASDAQ:EBAY) PayPal.
And lest you think the weak economy and persistently high unemployment might get in the way of growth, those are actually expected to help Discover and the wider credit-card industry.
As analysts at Trefis note, Spending Monitor — which surveys consumer spending intentions — revealed that 44% of respondents expect household expenses to increase in the coming months.
However, since “national household income continues to drop in the tough economic and job environment, credit card use and loans can be expected to rise in the near future,” Trefis says.
Indeed, average credit-card loans outstanding have bounced back from their 2011 bottom, and are projected to soon return to pre-crisis peaks.
It all bodes well for Discover, and even after jumping more than 60% this year, the stock still doesn’t look particularly expensive. The forward price-to-earnings ratio of 9.5 still is about 25% below its own five-year average, according to data from Thomson Reuters Stock Reports.
Are shares still a buy? Probably. As InvestorPlace Assistant Editor Kyle Woodley points out, the company is making a habit out of pleasantly surprising analysts, and the spread of its business tentacles could mean a lot of previously unaccounted-for potential.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.