Stephen Biggar — senior analyst at Argus Research — chose PayPal (PYPL) as his Top Pick last year; the stock rose 28% and continues to earn his buy rating. For the new year, he favors a leader in the credit card market.
Discover Financial Services (DFS) is a direct banking and payments network company; the company pioneered cash-rewards credit cards.
The network business consists of the Discover Network; PULSE, one of the nation's leading ATM/debit networks; and Diners Club International, a global payments network. Discover also offers personal loans, student loans, online savings accounts, money market accounts, and CDs.
International expansion remains a significant opportunity for Discover, as its domestic credit card portfolio still accounts for 80% of average earning assets. In terms of loan growth, credit quality, and ROA, Discover has outperformed most of its major card peers in recent quarters.
Where Discover has competed in the higher-rewards space, it has done so in lucrative areas. These include a travel rewards card targeting prime credit customers that hold a monthly balance.
The remainder of the lending mix consists of private student loans and personal loans, but at about 20% of the total, these products have not yet had a strong influence on balance sheet growth.
We expect credit cards to be the strongest driver of loan growth, aided by positive macroeconomic factors, including healthy employment and wage growth.
Based on current EPS growth and a still favorable credit cycle, we believe that multiples on leading credit card companies have room to improve. Discover's dividend yield of 2.2% adds to the investment case.
