This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Discover Keeps Cooking With 27% Return on Equity (Update 1)

Stocks in this article: BAC C JPM WFC DFS COF AXP USB

Investors should also consider Discover's forward earnings multiple. The company's shares closed at $44.33 Tuesday, trading for 9.3 times the consensus 2014 earnings estimate of $4.77, among analysts polled by Thomson Reuters. That is a pretty cheap forward P/E, when considering the company's return on equity and continued growth.

KBW analyst Sanjay Sakhrani rates Discover "outperform," with a $48 price target, and said in a note to clients late on Tuesday that "following 1Q13 results, we came away incrementally positive on Discover given the solid underlying operating trends and multiple avenues of earnings upside."

"While probably not having the longest runway to the upside of our outperform-rated names to its shares, trading at less than 10x our 2014 EPS estimate, we believe that current levels discount the quality of the company/earnings as well as the multiple-enhancing traits of the network," Sakhrani wrote.

KBW estimates Discover will earn $4.66 a share this year, with EPS declining to $4.50 in 2014.

Discover's shares were down slightly in late morning trading, to $44.26. The broad indexes were all down slightly, after the U.S. Census Bureau reported that durable goods orders declined 5.7% in March after rising 4.3% in February. Orders excluding transportation were down 1.4%. The average estimate among economists polled by Thomson Reuters is for durable goods orders to fall by 2.8% in March, with core durable goods orders rising 0.5%.

FBR analyst Scott Valentin on Wednesday reiterated his "outperform," rating for Discover, with a $48 price target, saying in a note that the company's growth in card balances was mainly due to the success of the Discover "It" card, which, he writes, "was marketed heavily in 1Q13 and 4Q12."

"Discover is taking market share as evidence by stronger-than-peer average receivable growth," Valentin wrote, adding "we expect Discover to continue to gain share due to continued Discover "It" marketing." FBR estimates that for all of 2013, the company's card balances will grow by 4.5%.

Valentin expects Discover's net interest margin to remain "relatively stable," in a range of 9.3% to 9.4% through the end of the year, because of "general pricing discipline" and declining funding costs. When discussing the prospects for success of several growth initiatives, the analyst wrote "at present, payment services account for only 5% of income. If Discover were to grow these businesses, we believe it should trade above 10x earnings."

Discover repurchased 6 million common shares during the first quarter, for $238 million. The company said its share count was reduced by 1%. The company has a $2.4 billion buyback plan in place.

"We believe the combination of stable credit, high ROE (~20%), large return of capital (~100% of earnings in 2012), and increasing receivables market share makes Discover an attractive investment at current valuations," Valentin wrote.

JPM Chart JPM data by YCharts

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

-- 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 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.
2 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs