Discover Financial Services engages in direct consumer banking services, taking deposits and offering credit card, student, residential mortgage, and other loans to its customers. The firm also operates the Discover, PULSE, and Diners Club networks. The majority of transactions processed by the firm are of the closed-loop variety, in which Discover issues cards to customers as well as maintains direct relationships with merchants.
In our opinion Discover’s moat comes from both its lending business and payment network. The lack of a branch network makes Discover a more efficient consumer lender than many of its competitors. Discover has built a substantial network where it’s card is widely accepted by merchants is attractive to cardholders, and vice versa.
Discover Financial Services remains on track to register modest top- and bottom-line gains this year. Discover has lifted its quarterly cash dividend. It hiked the payout by $0.04, or some 17%, to $0.28 a share. This action highlights management's pattern of returning additional capital to shareholders, a strong balance sheet, and ample prospects. The stock offers worthwhile capital appreciation potential for the trek to 2018-2020. Moreover, DFS appears to be selling at a reasonable value on a price-to-earnings basis
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Leading market position in the US banking sector providing competitive advantage
Ample liquidity and management of strong credit and deposits growth providing flexibility to endure unforeseen developments
Inability to manage concurrent non-interest income skewing the revenue structure to interest rate sensitivity
Limited international presence increasing the concentration risk
Regulatory changes could increase compliance spending
Intense competition likely to erode market share and profitability
Growing banking sector in the US
Growth opportunities in credit card and deposits business to be pursued through relevant acquisitions
Auto loans segment to accelerate growth of consumer banking segment
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The information presented in this report has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guranteed. All material is subject to change without notice. The views and opinions expressed are those of Focused Stock Research and/or WALT ST Investment Management, Ltd. and in no way reflect the views and opinions of Investment Consultants nor their Broker Dealers.