For the same reason the stock, at around $63, has moved 13% higher for the year to date: Discover's ability to increase total loan balances by nearly 7% over the year ago quarter coupled with its lucrative business of lending money to its credit card users.
The other reason to own Discover at this point is the stock trades at half the forward price/earnings ratio of its competitors MasterCard (MA) and Visa (V) . That inequity eventually will be recognized by analysts, which will be a catalyst for the stock to zoom higher over the next year.
Discover is gaining in the balance transfer department as balances have increased 6% during the latest quarter. As customers transfer credit card balances, Discover begins collecting generous interest income on these unpaid amounts which translates to earnings that fall right to the bottom line.
Non-card related lending is also expanding for the Riverwood, Ill., financial services giant. There's enormous growth potential when it comes to personal and student loans, which the company has indicated it will pursue.
Whether through competitive interest rates or smart incentive programs to attract new customers, the company has a knack for earning the confidence of clientele in many demographics. That contributed to Discover's ability to increase total loan balances by nearly 7% over the year ago quarter ending June 30.
Management knows that the current borrowing environment is flat to benign. That's why the company is pursuing prime-quality borrowers who pay their monthly minimums due. Also boosting the company's net interest income by more than 11% has been a healthy decline in the funding costs of its loans.
From an investment perspective Discover Financial offers an operating margin of nearly 57% plus a profit margin of 35% that most companies only dream about. While earnings per share, by my estimates, should grow by 11% during the quarter ending September 30, the total 2014 EPS is likely to be up nearly 8%.
Keep in mind that shares of DFS offer investors a hearty 23% return on equity. By comparison Visa's ROE is only 20.5% while MasterCard leads the pack with a 55% ROE.