The consumer finance industry is experiencing swift technological evolution, marked by innovations like online banking, mobile payments, and fintech. These advancements are fundamentally altering traditional business models, paving the way for more efficient and accessible financial services.

Against the backdrop, this article compares the fundamentals of two leading consumer finance companies, Discover Financial Services (DFS) and American Express Company (AXP), to ascertain which one is better positioned to thrive.

The pandemic hastened the embrace of digital payments across multiple sectors. Consumers are showing a growing openness to novel technologies, drawn by the ease and user-friendly nature of digital payment methods compared to traditional cash or card transactions. Consequently, consumer finance companies are promptly adapting their offerings to meet changing customer preferences.

McKinsey's 2023 Digital Payments Consumer Survey disclosed that at least nine out of ten individuals utilized some form of digital payment within the past year. This figure has demonstrated steady growth over the survey's eight-year span and saw a notable acceleration during pandemic-related lockdowns. In 2021, it initially surpassed 80% of consumers.

This growing preference for digital payments and online transactions signals promising growth opportunities for consumer finance companies. Projections indicate that the global consumer finance market is poised to reach $1.96 trillion by 2029, growing at a CAGR of 7.1% from 2023 to 2029.

Meanwhile, AI has become increasingly prevalent in the consumer finance industry. Technological advancements such as intelligent automation, AI-driven robo-advisory services, and the incorporation of generative AI are poised to bring about profound changes in the financial landscape this year. These developments are set to bolster efficiency, foster innovation, and elevate the quality of customer experiences.

Considering the favorable trends shaping the industry's future, both DFS and AXP should reap the benefits. However, AXP appears to be a clear winner in terms of price performance. Over the past six months, AXP’s shares have rallied 24.3%, while DFS’ shares gained 10.1%. Likewise, over the past three months, AXP’s shares have climbed 34.6%, compared to DFS’ 21.2% surge during the same period.

Moreover, AXP’s shares have soared 8.8% over the past month to close the last trading session at $205.65. In contrast, DFS’ shares have tumbled 5.5% over the past month to close the last trading session at $105.66.

However, to find out which Consumer Financial Services stock could be the ideal buy, let’s dig deeper into their fundamentals:

Recent Developments

On October 12, 2023, Discover® Global Network, a DFS brand, launched a fresh cloud-based network tokenization platform, providing companies with a scalable and adaptable token solution for their customers and merchants. This new platform enables seamless integration of stored payment tokens into the payment process.

Serving as an extension of the existing Discover Stored Payment Tokens service, the network tokenization platform enriches the interaction between merchants and token requestor aggregators, empowering DFS partners with an enhanced token solution poised to elevate their operations.

On December 7, 2023, AXP declared a quarterly dividend of $ $0.60 per common share, payable to its shareholders on February 9, 2024. The company’s annual dividend of $2.40 translates to a 1.17% yield on the prevailing price level, while its four-year average dividend yield is 1.33%. Its dividend payouts have grown at CAGRs of 11.7% and 10.2% over the past three and five years, respectively.

Recent Financial Results

For the fiscal fourth quarter, which ended on December 31, 2023, DFS’ net interest income increased 13.1% from the year-ago value to $3.47 billion. On the other hand, during the same quarter, the company’s net income and EPS came in at $388 million and $1.54, declining 62.1% and 58.8% from the prior-year quarter, respectively.

In the fiscal fourth quarter, which ended on December 31, 2023, AXP’s total revenues net of interest expense rose 11.4% from the prior-year quarter to $15.80 billion. Meanwhile, the company’s net income and EPS improved 22.9% and 26.5% from the year-ago value to $1.93 billion and $2.62, respectively.

Past and Expected Financial Performance

DFS’ revenue and total assets have grown at CAGRs of 29.5% and 10.3% over the past three years, respectively. Meanwhile, its net income and EPS have increased at CAGRs of 37.1% and 46.3% during the same time frame, respectively.

Street expects DFS’ EPS for the fiscal 2024 first quarter (ending March 2024) to decline 11.1% year-over-year to $3.18. While its revenue for the ongoing quarter is projected to come in at $4.06 billion. Furthermore, the company’s EPS is anticipated to decline by 7.3% per annum over the next five years.

Conversely, AXP’s revenue and total assets have improved at CAGRs of 21% and 10.9% over the past three years, respectively. In addition, its net income and EPS have grown at CAGRs of 38.8% and 43.8% over the same period, respectively.

Analysts predict AXP’s EPS and revenue for the fiscal 2024 first quarter (ending March 2024) to increase 24.6% and 10.4% year-over-year to $2.99 and $15.76 billion, respectively. Moreover, its EPS is forecasted to improve by 14.6% annually over the next five years.

Profitability

AXP’s trailing-12-month asset turnover ratio of 0.23x is higher than DFS’ 0.09. Likewise, AXP’s trailing-12-month Return On Common Equity (ROCE) of 31.31% is higher than DFS’ 20.16%. Furthermore, AXP’s trailing-12-month Return On Total Assets (ROTA) of 3.21% is higher than DFS’ 1.94%.

Thus, AXP is more profitable.

POWR Ratings

DFS has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. Conversely, AXP has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. DFS has a D grade for Sentiment, justified by its negative earnings projections. Whereas, AXP has a B grade for Sentiment, consistent with its positive analyst estimates. 

Moreover, DFS’ C grade for Quality can be justified by its mixed profitability metrics. DFS’ trailing-12-month ROCE of 20.16% is 88.3% higher than the industry average of 10.70%. However, the stock’s trailing-12-month asset turnover ratio of 0.09x is 56.7% lower than the 0.21x industry average.

On the other hand, AXP’s B grade for Quality is in sync with its higher-than-industry profitability. Its trailing-12-month ROCE of 31.31% is 192.5% higher than the industry average of 10.70%. Also, the stock’s trailing-12-month cash per share of $65.01 is 997.2% higher than the $5.92 industry average.

Among the 45 stocks in the B-rated Consumer Financial Services industry, DFS is ranked #37, while AXP is ranked #11. 

Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, and Stability. Click here to view DFS ratings. Get all AXP ratings here.

The Winner

Buoyed by the growing preference for digital payments and technological breakthroughs within the industry, both DFS and AXP stand to gain. However, AXP’s stronger financial position, higher profitability, and optimistic analyst estimates could position it as a superior investment choice compared to DFS.

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

What To Do Next?

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AXP shares were trading at $207.36 per share on Wednesday morning, up $1.71 (+0.83%). Year-to-date, AXP has gained 11.04%, versus a 4.56% rise in the benchmark S&P 500 index during the same period.

Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.

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