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Stocks Under $10 with 50-100% upside potential - 14 days FREE!

10 Cheapest Bank Stocks for 2013

Stocks in this article: BAC C JPM RF COF DFS PNC BPOP OFG HMST FBC

8. Discover Financial Services

Shares of Discover Financial Services (DFS) closed at $37.99 Friday, returning 60% year-to-date, following a 31% return during 2011.

The shares trade for 2.2 times tangible book value, and for 8.8 times the consensus fiscal 2013 EPS estimate of $4.33. The consensus fiscal 2014 EPS estimate is $4.49.

The company on Dec. 20 raised its quarterly dividend by 40% to 14 cents. Based on the increased payout, the shares have a dividend yield of 1.47%. The company repurchased 10 million common shares during the fiscal fourth quarter for $401 million, and was authorized under its current stock repurchase plan to buy back roughly $800 million worth of additional shares.

Discover's valuation and the fantastic track record for the shares even during a very difficult 2011 for the banking industry, reflect a strong and consistent earnings track record. For its fiscal fourth quarter ended Nov. 30, the company reported net income allocated to common shareholders of $551 million, or $1.07 a share, declining from $627 million, or $1.21 a share the previous quarter, but increasing from $513 million, or 95 cents a share, a year earlier.

Discover reported a fiscal fourth quarter return on equity of 23%, compared to 28% the previous quarter. Earnings declined sequentially because the company increased its provision for loan losses to $338 million from $126 million in the fiscal third quarter. The provision for loan losses was $319 million during the 2011 fiscal fourth quarter.

Guggenheim analyst David Darst on Dec. 20 wrote that Discover's "reserve release has ended, but credit cost remains low, resulting in a strong ROE and providing opportunity to invest in the payments business." The analyst added that "has multiple levers to drive profitability and growth; however, we expect higher provisioning to limit EPS growth in 2013/14. Despite this dynamic, consensus estimate revisions remain positive and the shares trade at an attractive valuation that does not fully reflect payment partnership opportunities, in our view."

Darst rates Discover a "Buy," with a $48 price target, and estimates the company will earn $4.44 a share in 2013, with EPS climbing to $4.50 in 2014.

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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