“Discover Financial Services (DFS) is a bank holding company. Through its subsidiaries, the company operates in two segments: Direct Banking and Payment Services. The company’s Direct Banking segment includes Discover Card-branded credit cards issued to individuals and small businesses and other consumer products and services, including personal loans, student loans, prepaid cards and other consumer lending and deposit products.
“The company’s Payment Services segment includes PULSE, Diners Club and its third-party issuing business, which includes credit, debit and prepaid cards issued on the Discover Network by third parties. As of November 30, 2010, the company had total assets of $60.78 billion and total deposits of $34.41 billion. We project that Discover will strongly outperform the market over the next 6 to 12 months. This projection is based on our analysis of three key factors that influence common stock performance: earnings strength, relative valuation, and recent price movement. ... Earnings strength is positive. Ford’s earnings momentum measures the acceleration or deceleration in trailing 12 month operating earnings per share growth. ... While Discover’s earnings have increased from $1.01 to an estimated $2.60 over the past five quarters, they have shown acceleration in quarterly growth rates when adjusted for the volatility of earnings. This indicates an improvement in future earnings growth may occur.
“Relative valuation is very positive. Discover’s operating earnings yield of 10.9% ranks above 93% of the other companies in the Ford universe of stocks, indicating that it is undervalued. ... Price movement is very positive. Discover’s stock price is up 73.5% in the last 12 months, up 8.9% in the past quarter and down 3.0% in the past month. This historical performance should lead to above-average price performance in the next one to three months.”
Richard Segarra, CFA, Ford Equity Research Report, 5/27/11
