Discover Financial Returns to Profitability

Updated from 10:57 a.m. EST

Discover Financial Services (DFS) surged 14% after the credit card payments firm returned to profitability during its fiscal fourth-quarter, fueled by a better-than-expected unemployment report.

The Riverwoods, Ill.-based Discover earned $432.3 million, or 89 cents a share, during the quarter ended Nov. 30, compared with a loss of $56.5 million, or 12 cents a share, during the year-ago period.

Analysts polled by Thomson Reuters, on average, forecast earnings of 13 cents per share for the quarter. Analysts' estimates do not always include gains and charges.

Discover's results were bolstered by an $863 million payment received as part of a $2.75 billion settlement of an antitrust lawsuit with Visa (V) and MasterCard (MA). The payment, received on Oct. 27, boosted profit by $535 million after taxes. Discover said it will receive the remaining funds in four $472 million installments quarterly in 2009. The lawsuit claimed MasterCard and Visa harmed Discover's business by preventing their member banks from issuing credit cards for Discover's network.

Despite its profitability in the quarter, Discover faces mounting card losses as more customers fell behind on payments. Many credit card lenders including American Express (AXP) and large banks with significant credit card businesses such as Bank of America (BAC), Citigroup (C), even JPMorgan Chase (JPM) are also facing increasing losses as more customers fall behind on payments amid the ongoing recession.

CEO David Nelms said on a conference call this morning that a "sharp increase" in the unemployment rate has taken a toll on the consumer credit environment.