We maintain our Outperform recommendation on Discover Financial Services (DFS) based on higher transaction and sales volumes along with record-low delinquency and charge-off rates. The company pursues a strong inorganic growth policy, which is expected to boost earnings and foster portfolio diversification.

Discover reported first-quarter earnings per share of $1.18, substantially ahead of the Zacks Consensus Estimate of 92 cents as well as 84 cents recorded in the year-ago quarter. Net income spiked 35.7% year over year to $631 million.

Discover is one of the largest card issuers in the U.S. and has gained significant international network opportunity following its integration with the Diners Club.The expansion of the company’s franchise agreement with Diners Club Ecuador in March 2012, to include the issuance of Discover cards in the Republic of Ecuador, marks the issuance of Discover Cards outside the U.S. for the first time.

Additionally, the agreement with National Payments Corporation of India, inked in March 2012, is expected to increase the network transaction volume as well as boost the acceptance of Discover’s cards in India, which is one of the fastest growing markets for card transactions.

Moreover, Discover credit card sales volume touched an all-time high of $100 million last year, owing to improved consumer spending and credit quality trends. The growth continued in the first quarter of 2012, with sales volume of $25.6 billion, up 7% year over year, primarily due to increase in the customer base.

However, Discover incurs considerable expenses in order to compete with other credit card issuers to attract and retain customers and increase card usage. Discover’s competitors in the credit card business, such as MasterCard Inc. (MA) and Visa Inc. (V), have substantially larger scales of operation than Discover, thereby posing ample risk on the operational front.

Not only do its peers have relatively stronger global presence and brand names, but they also own exclusive contracts with many financial institutions, thereby limiting Discover’s business opportunities with such institutions. Moreover, they have more financial resources than the company, which enables them to offer better incentives to attract customers.

The Zacks Consensus Estimate for the second-quarter 2012 is earnings of 95 cents per share, down about 12.7% year over year. For full-year 2012, the Zacks Consensus Estimate stands at $3.99 per share, down 1.7% from 2011.

Currently, Discover caries a Zacks #2 Rank, implying a Buy rating in the short term.