How this payment process works is the customer brings up the app on their phone and then swipes the back of the phone near the payment terminal. The terminal will be sent the payment information and the customer is then charged for the items. This means your smartphone basically becomes your wallet and you no longer have to dig for cash in your pocket or pull a card out of your old school wallet. If you lose your phone, you can lock the ability to make payments by logging on from a computer. This makes it both simple and safe. Google Wallet is also a major player in online payments. At the checkout portion of an online purchase, consumers can select to pay via Google Wallet, a process that is exactly like PayPal’s. This deal with Google is great for Discover.
Financials & Stock Performance
At the close of trading on Feb. 21, shares Discover Financial Services are selling at $38.33. With 2012 earnings of $4.46, this means they are trading at just 8.59 times earnings. This is incredibly cheap compared to competitors. Mastercard trades at a multiple of 24, Visa trades at a multiple of 44, and American Express trades at a multiple of 16. The industry average price-to-earnings ratio is 30.90, which would put Discover at over $137 per share. This is not a likely move, but it shows that their multiple is much too low at these levels.
Currently, analysts project that Discover’s earnings will fall by $0.08 to $4.38 in 2013, but then they will be back on the rise in 2014 and 2015. This predicted drop in 2013 could easily be wrong, as there is a high estimate of $4.59. Analysts expect Discover to earn $4.50 per share in 2013 and $4.64 in 2014. This is not the strongest growth you will find, but the low multiple makes Discover cheaper than other credit card companies.
On Dec. 20, 2012, Discover reported fourth quarter earnings. Their credit card sales volume increased 6% year-over-year to $26.5 billion. Credit card loans also grew by 6%. Direct banking income grew 7%, with personal loans increasing 24% and student loans increasing 6%. Payment services income decreased for the quarter, mainly due to increased marketing and employee expenses. Payment services overall grew by 13% to $49 billion for the quarter. These are all positive numbers for Discover’s mission for growth.
Discover currently pays an annual dividend of $0.56, or 1.46%. This yield is much higher than Mastercard’s 0.50% and Visa’s 0.80%, and slightly higher than American Express’ 1.3%. Discover has increased this dividend since 2010 and should continue raising it.
Since the market lows in March of 2009, Discover is up an incredible 686%. They have a two year return of over 84% and a 31% gain over the last 52 weeks. Over the last three months, however, Discover is down 6%. This means that now may be a great entry point.
Bottom Line
Discover Financial Services is geared for growth over the next several years. The strategic partnerships with PayPal and Google Wallet should increase earnings with continued transaction growth. I am initiating an outperform call on CAPS, because this stock is a BUY.
The article Discover The Greatness of This Financial Company originally appeared on Fool.com and is written by Joseph Solitro.
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