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Discover Financial Rallies 44.3% YTD: Will Growth Continue?

Discover Financial Services DFS has been gaining momentum on the back of its impressive top-line performance, solid Direct Banking Business and a soaring card sales volume.

In third-quarter 2019, the company’s adjusted earnings came in at $2.36 per share, beating the Zacks Consensus Estimate by 3.1%. The reported figure also improved 15.1% year over year on higher revenues and solid loan growth. Furthermore, the Direct Banking and Payments Services segments witnessed growth in the third quarter.

Year to date, shares of this Zacks Rank #3 (Hold) company have surged 44.3% compared with its industry's 33.8% rally.

What’s Driving the Stock?

Discover Financial has been witnessing strong revenue growth on the back of its high net interest income and other total income. In the first nine months of 2019, the company’s interest income rose 9% year over year. We expect this major card issuer in the United States to retain the favorable revenue stream going forward, courtesy of its attractive core business and a dominant market position.

Meanwhile, the company’s Direct Banking business has been contributing to its growth story over the past several years. Within this business, the private student loan portfolio has grown significantly over the last eight years.

In order to attract new customers, Discover Financial is consistently launching products tailored to suit specific customer needs. This leading innovator in the credit card industry is also active in forging alliances and partnerships, on the back of which, card sales volume increased over the past many years. Backed by high consumer spending, card sales volume rose 5% year over year in the first nine months of 2019.

Recently, its payment brand Discover Global Network along with Cabal, a local payments network in Argentina, inked a deal to boost the international acceptance of cards issued by both the companies.  Discover Financial’s other alliances with Verve, Sage Pay and more poises it well for long-term growth.

Discover Financial’s capital position is also commendable. Notably, the company has implemented several capital-boosting measures including equity and debt offerings, which have helped it achieve a sturdy capital standing. A disciplined capital deployment should instill investors’ confidence in the stock.

Is Further Upside Left?

We expect the company to witness a consistent price surge on the back of its solid fundamentals, such as capital management and high card sales.

Its return on equity — a profitability measure — of 26.8% is higher than the industry's 13.1% average, which remains an added positive.

Stocks to Consider

Investors interested in the same space might consider some better-ranked stocks like CURO Group Holdings Corp. CURO, Cardtronics plc CATM and Global Payments Inc. GPN.

CURO Group Holdings is a diversified consumer finance company. This Zacks Rank #2 (Buy) stock delivered a positive earnings surprise of 16.6% over the preceding four quarters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cardtronics offers automated consumer financial services through its network of automated teller machines and multi-purpose financial services kiosks. The company came up with average four-quarter beat of 28.8% and flaunts a Zacks Rank of 1.

Global Payments provides payment technology and software solutions for card, electronic, check, and digital-based payments. With a Zacks Rank of 1, the company came up with an average four-quarter earnings surprise of 2.4%.

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