Mastercard vs. Discover: Which Credit Card Stock is a Better Choice?

Digital banking and payment services company Discover Financial Services (DFS) operates in two segments: Digital Banking and Payment Services. While the Digital Banking segment offers Discover-branded credit cards, the Payment Services segment operates the PULSE network. On the other hand, Mastercard Incorporated (MA) provides transaction processing and other payment-related products and services. It facilitates the processing of payment transactions, including authorization, clearing, and settlement.

The use of credit cards and other online payment methods has increased significantly over the past year, as people have relied more on the digital mode of payments amid a remote lifestyle. With gradual economic recovery this year, aided by rapid vaccination, spending on services and discretionary items has increased significantly. According to the Commerce Department, the overall consumer spending rose 0.8% in August. The growing technological innovation and rapid adoption of digital prepaid card services should drive the growth of the credit card market in the upcoming months. According to Research and Markets, the global credit card market is expected to grow at a CAGR of 3% to hit $103.06 billion in 2021.

DFS has gained 2.4% over the past month, while MA has returned 1.2%. Also, DFS’ 40.6% gains over the past nine months are significantly higher than MA’s negative returns. Moreover, DFS is the clear winner with 106.8% gains versus MA’s 1.6% returns in terms of the past year's performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On May 18, 2021, Arab Financial Services and DFS signed a strategic network alliance agreement expected to increase both organizations' global acceptance footprint. Matt Sloan, the vice president of international markets at DFS, said, “By connecting with innovative payment partners like AFS, we can provide our cardholders with the global reach and localization they require.”

On September 28, 2021, MA unveiled Mastercard Installments, a unique and innovative Buy Now, Pay Later program that delivers greater choice at checkout, both in-store and online. This could help the company meet the growing consumer demand for flexible, digital-first payment options.

Recent Financial Results

DFS’ total revenue net of interest expense increased 34% year-over-year to $3.58 billion for the second quarter ended June 30, 2021. Its income before taxes grew 6.9% sequentially to $2.22 billion, and its net income increased 9.2% sequentially to $1.69 billion. Also, its EPS came in at $5.55, up 10.1% sequentially.

MA’s net revenue increased 36% year-over-year to $4.50 billion for the second quarter ended June 30, 2021. Its operating income grew 37% year-over-year to $2.30 billion, while its adjusted net income increased 41% year-over-year to $1.90 million. Also, its adjusted EPS came in at $1.95, up 43% year-over-year.

Past and Expected Financial Performance

DFS’ revenue and EPS have grown at CAGRs of 13.3% and 35.5%, respectively, over the past three years. Analysts expect the company’s revenue to increase 8.8% for the quarter ended September 30, 2021, and 8.9% this year. Its EPS is expected to increase 39.6% for the quarter ended September 30, 2021, and 15.4% for December 31, 2021. Moreover, its EPS is expected to grow at a rate of 55.8% per annum over the next five years.

On the other hand, MA’s revenue and EPS have grown at CAGRs of 6% and 17.3%, respectively, over the past three years. The company’s revenue is expected to increase 29.2% for the quarter ended September 30, 2021, and 23.2% in fiscal 2021. Its EPS is expected to grow 37.5% for the quarter ended September 30, 2021, and 36.6% for December 31, 2021. Also, MA’s EPS is expected to grow at a rate of 27.3% per annum over the next five years.

Profitability

MA’s trailing-12-month revenue is 1.53 times what DFS generates. However, DFS is more profitable, with a net income margin of 44.76% compared to MA’s 43.22%.

Again, MA’s ROE and ROA of 109.66% and 16.45% are higher than DFS’ 42.61% and 4.33%, respectively.

Valuation

In terms of forward non-GAAP P/E, MA is currently trading at 42.3x, 430.7% higher than DFS’ 7.97x. Moreover, MA’s forward non-GAAP PEG of 0.09x is 1611.1% higher than DFS’ 0.76x.

So, DFS is more affordable here.

POWR Ratings

DFS has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, MA has an overall rating of C, which translates to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Both DFS and MA have a B grade for Momentum. This is justified given DFS’ 29.6% returns over the past six months and 40.6% gains over the past nine months and MA’s 1.2% gains over the past month.

DFS has a grade of B for Sentiment, in sync with favorable analyst sentiment. On the other hand, MA has a C grade for Sentiment.

Of the 52 stocks in the Consumer Financial Services industry, DFS is ranked #6 while MA is ranked #20.

Beyond what I’ve stated above, we have also rated the stocks for Growth, Value, Stability, and Quality. Click here to view all the DFS ratings. Also, get all the MA ratings here.

The Winner

The rapid technological innovations and the recovering economy are driving the growth of the credit services sector. So, the credit card space is expected to continue growing in the upcoming months, benefiting DFS and MA. However, it could be wise to bet on DFS now because of its lower valuation and higher earnings growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Consumer Financial Services industry here.

DFS shares were unchanged in after-hours trading Tuesday. Year-to-date, DFS has gained 42.55%, versus a 16.97% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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