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Will Stiff Competition Limit Discover Financial’s Growth?


On Oct 17, 2016, we issued an updated research report on Discover Financial Services DFS.

Discover Financial has positioned itself as one of the major card issuers in the United States by enhancing its product line. This direct banking and payment services company regularly launches improved and upgraded offerings to meet the varying needs of customers. This not only supports persistent revenue growth but also bolsters the company’s long-term growth potential. Increased consumer spending on credit cards is another positive.

The company’s strong fundamentals continue to support inorganic growth. Several capital boosting initiatives, both in terms of debt and equity offerings, have been facilitating Discover Financial in efficient capital deployment. Increase in dividend payment at regular intervals and frequent yet well-planned share repurchases have also cemented investors’ confidence on the stock.

Apart from mergers and acquisitions, Discover Financial forms strategic alliances and partnerships to strengthen its global payment network. In fact, the company has already established its presence in India, China, Russia, Nigeria and the Middle-Eastern countries.

Nevertheless, the company faces stiff competition from credit card industry giants like Visa Inc. V, MasterCard Inc. MA and American Express Company AXP, which might limit its business. Hence, Discover Financial undertakes several marketing and business development initiatives, which in turn, result in escalating expenses. In addition, costs incurred due to several anti-money laundering program enhancements, other planned marketing, technology and infrastructure investments and high legal, regulatory and compliance costs raise concerns.

Also, the company’s Payments Service segment continues to underperform. A previously announced loss of volume from a third-party debit issuer continues to affect this segment’s revenues.

Discover Financial is scheduled to announce its third-quarter 2016 earnings after the market closes on Oct 25, 2016. The company presently carries a Zacks Rank #3 (Hold). Although Discover Financial has a favorable Zacks Rank, its Earnings ESP of -0.68% complicates surprise prediction. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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