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TheStreet Open House

5 Most Lean and Mean Bank Stocks

1. Discover Financial Services
Shares of Discover Financial Services (DFS - Get Report) closed at $38.51 Wednesday, returning 61% year-to-date, following a 31% return during 2011.

The shares trade for 2.4 times tangible book value, according to Thomson Reuters Bank Insight, and for 10 times the consensus 2013 EPS estimate of $4.02. The consensus 2012 EPS estimate is $4.23.

Based on a quarterly payout of 10 cents, the shares have a dividend yield of 1.04%.

Discover has been the most efficient of actively traded U.S. banks, with an efficiency ratio of 36.54%, for the 12-month period ended May 31. The company's fiscal year ends on Nov. 30.

Reflecting its emphasis on credit card lending and payment services, as well as the company's low-cost on-line deposit gathering model, Discover's ROA for the 12-months ended June 30 was 3.30%, while its ROE was 33.30%.

Discover in August announced a deal with eBay (EBAY) unit PayPal, for PayPal's customers to be able to use the service to make purchases at the 7 million retail locations that currently accept Discover, beginning in the second quarter of 2013.

KBW analyst Sanjay Sakhrani rates Discover "Outperform," with a price target of $40, saying after the PayPal deal was announced that it was "clearly a big win for the network side" of Discover's business, "as it exemplifies the value-added services it can provide and the optionality of the company's business model." The analyst added that "while there are likely to be some costs associated with the roll-out, we think it should be manageable for the company," and estimated that "Discover could earn 10-20 bps of the transaction, which would be consistent with Visa (V) and Mastercard (MA) economics."

Sakhrani estimates that for its fiscal 2012 ended Nov. 30, Discover will earn $4.21 a share, followed by EPS of $3.96 in fiscal 2013.

DFS Chart DFS data by YCharts

Interested in more on Discover Financial Services? See TheStreet Ratings' report card for this stock.

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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