Avoiding Discover Financial

| About: Discover Financial (DFS)

Discover Financial Services (NYSE:DFS) reported earnings this morning of $1.00 per share in-line with estimates. While net income was down 10.5% year-over-year, revenue increased 6% to $1.8 billion, right in line with estimates. The company returned $500 million to shareholders in the quarter in the form of dividends and share buybacks. Discover recently started offering home loans after completing the acquisition of Tree.com, and will start checking services later this year. Home loans are expected to be a break-even business for the near future. Tree.com generated $3 billion in mortgage origination over the past year; Discover has a long term goal of reaching $30 billion in mortgage origination.

Discover trades at 8.5 times forward earnings, and a PEG ratio of .75, this is compared to competitors American Express (NYSE:AXP), Master Card (NYSE:MA), and Visa (NYSE:V) that all carry PEG ratios of about 1. Analysts have a current price target of $37.64, about 13% above the current price level.

Discover does not appear to be a strong investment at this point. The company's competitors are much larger and have a faster growth rate then Discover. Buying into Discover at this point would be based on a belief of a strong ramp up of the mortgage business, strong student loan business, and the company being able to drive earnings growth. Analysts are currently looking for only 1.2% gain in EPS this year, and are currently forecasting an EPS decrease of 5% in fiscal year 2013.

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Looking at the chart of Discover it has had three long up trends in the past three years and the first two were followed by about a year of sideways price action. Since breaking the third uptrend in the beginning of April the stock has traded sideways in a range from $35 to $30. Today's move on the earnings release has done nothing to move the stock out of this sideways trading range. I don't see any reason why this sideways move will end anytime soon, as analysts are looking for almost no growth in the near future.

Data sourced from: Company filings, and Yahoo!Finance. Chart from: Freestockcharts.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Tagged: , Credit Services, Earnings
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