Discover Value With This Credit Card Company: Discover Financial Services (DFS), Visa Inc (V), Mastercard Inc (MA)

Page 1 of 2

With consumer credit on the rise again, and tangible signs appearing of US economic recovery, things look pretty good for credit card companies. Supplying consumers with day-to-day credit, these companies tend to maintain huge gross margins. Of the four main US credit card providers, one has a considerably lower market cap, and is at the same time trading at a considerably lower valuation than the competition.

Company at a Glance

Discover Financial Services (NYSE:DFS) provides a range of payment and credit services to consumers and small business across the United States. The firm operates in two divisions, Direct Banking and Payment Services. The Direct Banking division offers credit cards, as well as a number of other consumer lending and saving services. The Payment Services division offers an ATM system and a global payment network. The stock has $20.54 billion market cap, and has had a good run of almost 36% in the last twelve months. It has a beta of 0.89 and a 1.4% dividend yield.

Discover Financial Services (NYSE:DFS)Comparative Valuations and Metrics

At first glance, the stock looks like a bargain. With a TTM P/E of only 9.26x, Discover is valued at less than half of Mastercard Inc (NYSE:MA)’s 24.05x and less than a quarter of Visa Inc (NYSE:V)’s 44.8x. The PEG ratio is also low at 0.87, similarly at a discount to the 1.14 industry average. The price to sales of 3.02 paints a similar picture compared to Mastercard Inc (NYSE:MA)’s 8.76 and Visa Inc (NYSE:V)’s 9.94. Gross margins on the other hand are fairly equal across the board, all between 96% and 100%. Discover maintains a return on equity of about 26% and has a payout ratio on its dividend of only 9%, meaning this could easily go up in the future. Could earnings be the reason for Discover’s undervalued status?

Earnings

Between 2010 and 2012, Discover Financial Services (NYSE:DFS) saw huge EPS growth going from $1.22 in 2010 to $4.46 in 2012. Growth is expected to take a bit of a breather in 2013, with a full-year analyst consensus of about $4.38. In the latest report for Q4 2012, EPS missed by 6 cents, whereas Visa Inc (NYSE:V) beat in both Q4 2012 and Q1 2013. Mastercard Inc (NYSE:MA) has also had a number of healthy beats throughout 2012. On the other hand, Discover raised dividends by 40% in Q4, and reported fairly healthy organic growth of 6% on total receivables. The Payments segment did rather well with 13% YoY purchase volume growth largely driven by the PULSE system. Net interest income increased 11% over the prior year.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

The 10 Most Peaceful Countries in the World

5 Big Reasons Communism Failed

The 15 Most Famous Carl Icahn Quotes

10 Scary Animals that are Actually Harmless

The 8 Most Famous Singer-Actors in Entertainment

The 10 Longest Wars of All Time

The 13 Worst Looking Foods that Taste Great

The 6 Most Gruesome Injuries Suffered During a Sports Match

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!