Discover Financial Services (DFS): Ringing Up Holiday Growth

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Cash registers are chiming loudly this holiday season on the strength of a brightening labor market and actual wage growth. Consumers are wielding their credit cards with increasing confidence, which should prolong the quarterly winning streak for Discover Financial Services (DFS).

Discover Financial (NYSE:DFS)Discover is a giant worldwide electronic payment services company, as well as a direct bank, with roughly 21 million total merchant locations. About 12 million of these point-of-sale member merchants generate about 8% of their business outside of the United States and Canada.

Discover’s direct bank runs the Discover Card, the company’s flagship credit card business, and offers a wide range of banking services and products, such as personal and student loans, savings accounts, certificates of deposit and prepaid cards.

DFS posted a robust third quarter 2014 earnings performance, stemming from revenue growth and improved interest income.

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Over the long haul, Discover stock should benefit from sound management that set the table for growth by making farsighted moves. As the battered global economy finally got off the ropes after the Great Recession of 2008-2009, Discover started to aggressively buy back shares and the share buyback program continues.

Management also has forged close relationships with technology innovators to stay in step with the emerging “digital wallet” and the rise of mobile payments. Notably, Discover and tech giant Google Inc (GOOG) recently made it easy for customers to save their Discover cards to Google Wallet.

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Like a reliable racehorse, Discover kept its astonishing winning streak alive with its third quarter operating results, which represented the fourth consecutive quarter in which it beat earnings estimates.

Third quarter earnings-per-share (EPS) came in at $1.37, a year-over-year increase of 14.2% and blowing past Wall Street’s consensus expectations of $1.34. Third quarter revenue reached $2.2 billion, an increase of 6.2% compared to the same period a year ago.

Net interest income hit $1.6 billion, a boost of 8.6% compared to the same period a year ago. The company also reported cash and cash equivalents of $11.3 billion in the period ending Sept. 30, compared to $10.9 billion in the period ending June 30.

The impressive operating performance was driven by Discover Financial’s Direct Banking segment, which posted earnings of $981 million, a year-over-year increase of 7%. The segment’s revenue came in at $129 million, a year-over-year gain of 7%, on the back of loan growth. Card sales were $29.3 billion, a 6% increase compared to the same period a year ago. Total loan revenue jumped 7.4% to $67.3 billion.

Also during the third quarter, Discover bought back 10 million shares worth $622 million. The company plans to repurchase shares worth $1.6 billion from now through March 2015.

The Bottom Line

Discover’s record of consistent revenue and earnings growth, combined with a rock solid balance sheet and healthy cash flow from operations, make DFS a sound bet on a newly assertive consumer.

The embrace of mobile payments and close relationships with heavyweights such as Google will prove festive for Discover stock this holiday season and beyond.

As of this writing, John Persinos did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/discover-financial-services-dfs-stock-holiday-growth/.

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