Financial Stock Trio - Buy, Hold, or Sell? Amid the escalating interest rate climate, finance companies appear favorably poised to augment their profit margins. Given this backdrop, let's assess the prospects of financial services stocks Moody's (MCO), Discover...
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Amid the escalating interest rate climate, finance companies appear favorably poised to augment their profit margins. Given this backdrop, let's assess the prospects of financial services stocks Moody's (MCO), Discover Financial Services (DFS), and Qifu Technology (QFIN) to determine the best investment opportunity in this space. Read on….
The financial services industry is strategically positioned to experience significant growth and expansion due to robust demand bolstered by solid consumer spending and increased business investment activity. The current high-interest rate environment benefits financial institutions such as banks, insurance companies, brokerage firms, and money management entities.
Given the industry's promising outlook, in this piece, we evaluate three financial services stocks to shed light on how they can help an investor capitalize on the prevailing industry tailwinds.
Solid buy candidates for 2024 appear to be Moody's Corporation (MCO) and Qifu Technology, Inc. (QFIN), given their robust fundamentals. Conversely, Discover Financial Services (DFS) should be kept on one's watchlist for better entry opportunities.
The Federal Reserve increased the federal funds rate to its highest point in 22 years since March 2022, with rates currently set between 5.25%-5.5%. Despite projections of rate cuts, it seems unlikely they will happen anytime soon, thus keeping rates elevated for some more months.
The financial services industry revenues positively correlate with the rising interest rates. Consequently, the prevailing high-interest condition compels borrowers to pay more interest, which could heighten revenue for these service providers.
The financial services market is expected to grow to $33.31 trillion in 2026. The market is then expected to grow at a CAGR of 6.3% from 2026 and reach $45.15 trillion in 2031.
The global consumer finance market is expected to grow at a CAGR of 7.1%, reaching $1.96 trillion by 2029. Key market propellants encompass swift loan approvals from government and private banks or financial organizations and the easy availability of various loans, such as home, auto, and student loans.
The digitization momentum in the industry has significantly transformed the financial services sector, fulfilling the requirements of individuals, corporations, governments, and investment institutions. The impact of financial technology, or 'Fintech,' has eradicated barriers to financial services while simultaneously enhancing consumer value, propelling small business growth, and bolstering the economy.
Given the industry tailwinds, it's time to examine the fundamentals of the three stocks within the financial services industry.
Stocks to Buy:
Moody's Corporation (MCO)
MCO operates as an integrated risk assessment firm worldwide. It operates in Moody's Investors Service and Moody's Analytics segments. Moody's Investors Service segment publishes credit ratings and provides assessment services. Its Analytics segment develops a range of products and services that support risk management activities of institutional participants in financial markets and offers subscription-based research.
On December 15, 2023, MCO's board of directors paid the shareholders a quarterly dividend of $0.77 per share for MCO's common stock. The company has a record of paying dividends for 23 consecutive years, reflecting its shareholder payback abilities.
Its annualized dividend rate of $3.08 per share translates to a dividend yield of 0.82% on the current share price. Its four-year average yield is 0.83%. MCO's dividend payments have grown at CAGRs of 11.2% and 11.8% over the past three and five years, respectively.
MCO's trailing-12-month gross profit margin of 70.73% is 17.2% higher than the 60.37% industry average. Likewise, its trailing-12-month EBITDA margin of 42.80% is 93.2% higher than the industry average of 22.16%.
MCO's revenue for the fiscal third quarter that ended September 30, 2023, came at $1.47 billion, up 15.5% year-over-year, while its adjusted operating income grew 32.2% from the prior-year quarter to $657 million.
The company's adjusted net income and adjusted EPS rose 31.5% and 31.4% from the prior-year quarter to $447 million and $2.43, respectively. For the nine months that ended September 30, 2023, its free cash flow increased 65.3% year-over-year to $1.48 billion.
Analysts expect MCO's revenue and EPS for the fiscal fourth quarter of 2023 (ended December 2023), are expected to increase 15.4% and 45.1% year-over-year to $1.49 billion and $2.32, respectively. MCO has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
Over the past nine months, the stock has gained 27.4% to close the last trading session at $376.80. It has gained 26.8% over the past year.
MCO's POWR Ratings reflect this positive outlook. MCO has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B for Stability and Quality. It is ranked #17 out of 102 stocks in the Financial Services (Enterprise) industry.
Click here to see MCO's other ratings for Growth, Value, Momentum, and Sentiment.
Qifu Technology, Inc. (QFIN)
Headquartered in Shanghai, the People's Republic of China, QFIN operates a credit-tech platform under the 360 Jietiao brand. It offers credit-driven and platform services such as loan facilitation and post-facilitation services to financial institution partners. Also, it provides e-commerce loans, enterprise loans, and invoice loans to SME owners.
On June 20, 2023, QFIN's Board of Directors approved a share repurchase plan, under which the company may repurchase up to $150 million worth of its ADS or Class A ordinary shares over the next 12 months beginning June 20, 2023. The new share repurchase program demonstrates the company's confidence in its business outlook and reflects its commitment to boosting long-term shareholder value.
QFIN pays an annual dividend of $0.82 per share, which translates to a dividend yield of 5.39% on the current share price. Its four-year average yield is 2.15%.
QFIN's trailing-12-month EBIT margin of 50.02% is 131% higher than the 21.65% industry average. Likewise, the stock's trailing-12-month gross profit margin of 65.06% is 7.8% higher than the industry average of 60.37%. Moreover, its trailing-12-month ROTA of 8.79% is 658.1% higher than the industry average of 1.16%.
QFIN's net revenue increased 3.3% year-over-year to $586.76 million for the fiscal third quarter that ended September 30, 2023. Its non-GAAP income from operations grew 18.6% year-over-year to $196.29 million.
Non-GAAP net income attributable to shareholders of QFIN was $162.46 million, up 13.7% from the prior year's period. Its non-GAAP net income per ADS attributable to ordinary shareholders of QFIN came in at $0.99, an increase of 11.1% year-over-year.
Analysts expect QFIN's revenue for the fourth quarter of 2023 (ended December 2023) to increase 5.9% year-over-year to $594.12 million. For the fiscal year ending December 2024, the company's revenue and EPS are expected to grow 12.7% and 14.2% year-over-year to $2.52 billion and $4.32, respectively.
QFIN's stock has gained 4% intraday to close the last trading session at $15.22. Over the past month, it gained 3.1%.
QFIN's sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
The stock has a B grade for Value, Momentum, and Quality. QFIN is ranked #2 among 48 stocks within the Consumer Financial Services industry.
In addition to the POWR Ratings I've just highlighted, one can see QFIN's ratings for Growth, Stability, and Sentiment here.
Stock to Hold:
Discover Financial Services (DFS)
DFS provides digital banking products and services, and payment services in the U.S. It operates in Digital Banking and Payment Services segments. The Digital Banking segment offers Discover-branded credit cards; loans; and direct-to-consumer deposit products. The Payment Services segment operates the PULSE, an automated teller machine, debit, and electronic funds transfer network and Diners Club International.
DFS' Board of Directors approved a new share repurchase program in April 2023. The new program authorized up to $2.7 billion of share repurchases through June 30, 2024. During the nine months that ended September 30, 2023, the company repurchased approximately 18.1 million shares for approximately $1.9 billion.
On December 7, 2023, DFS paid a quarterly dividend of $0.70 per share to the shareholders. Its annualized dividend rate of $2.80 per share translates to a dividend yield of 2.52% on the current share price. Its four-year average yield is 2.33%.
DFS' dividend payments have grown at CAGRs of 15.3% and 12.5% over the past three and five years, respectively.
DFS' trailing-12-month net income margin of 34.44% is 37.1% higher than the 25.13% industry average. Likewise, the stock's trailing-12-month ROCE and ROTA of 26.58% and 2.51% are 127.3% and 116.2% higher than the industry averages of 11.69% and 1.16%, respectively.
DFS' revenue net of interest expense increased 16.6% year-over-year to $4.04 billion for the fiscal third quarter that ended September 30, 2023. Its net interest income grew 16.8% year-over-year to $3.32 billion.
Its net income allocated to common stockholders and EPS came at $647 million and $2.59, respectively. For the nine months that ended September 30, 2023, its net cash provided by operating activities came at $5.69 billion, up 14.5% from the year-ago period.
Analysts expect DFS' revenue for the fiscal fourth quarter of 2023 (ended December 2023) to increase 10.1% year-over-year to $4.11 billion, while EPS is expected to decline 32.7% year-over-year to $2.54. For the fiscal year ending December 2024, the company's revenue and EPS are expected to grow 5.1% and 1.8% year-over-year to $16.59 billion and $12.47, respectively.
DFS' stock has plunged 6.1% over the past six months to close the last trading session at $111.23. Over the past three months, it gained 21.8%.
DFS' fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, which equates to a Neutral in our proprietary rating system.
The stock has a B grade for Momentum. It is ranked #35 within the Consumer Financial Services industry.
To see DFS' additional ratings (Growth, Value, Stability, Sentiment, and Quality), click here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these "death trap" stocks are lurking in your portfolio:
MCO shares . Year-to-date, MCO has declined -3.52%, versus a 0.22% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy.Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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