This Day On The Street
Continue to site
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

Investors Should Pick Discover Over Capital One: Credit Suisse

NEW YORK ( TheStreet) -- Discover Financial Services (DFS - Get Report) and Capital One (COF - Get Report) trade at similar valuations, but Credit Suisse analyst Moshe Orenbuch sees Discover as the better pick for long-term investors.

Shares of Discover closed at $47.67 Tuesday and traded for 9.9 times the consensus 2014 earnings estimate of $4.83 a share, among analysts polled by Thomson Reuters.

Capital One closed at $61.81 Tuesday and traded for 9.3 times the consensus 2014 EPS estimate of $6.65.

Orenbuch on Wednesday reiterated his "outperform" rating for Discover, with a 12-month price target of $50.00.

The analyst stressed his preference for Discover over Capital One in a note to clients. "We continue to forecast better receivables and revenue growth in 2013-14," he wrote, adding that Discover's "credit risk profile remains stronger."

Orenbuch also prefers Discover because the company "will return the vast majority of earnings to shareholders," while Capital One is still digesting its huge 2012 acquisitions of ING Direct and HSBC's U.S. credit card portfolio.

Discover repurchased 6 million common shares during the first quarter, for $238 million, reducing its share count by 1%. The company has a $2.4 billion buyback plan in place. Based on a quarterly payout of 20 cents, the shares have a dividend yield of 1.68%.

Following the completion of annual Federal Reserve stress tests in March, Capital One received approval to raise its quarterly payout to 30 cents from 5 cents, but announced no plans to buy back any shares through the first quarter of 2014. Based on the 30-cent payout, Capital One's shares have a dividend yield of 1.94%.

Loan and Revenue Growth

Discover stood out among credit card lenders by reporting continued growth for its credit card portfolio during the first quarter, with average card balances increasing to $49.3 billion from $49.2 billion the previous quarter and $46.6 billion a year earlier. The annual growth rate was 6%. Here's how that compared to other big card lenders:
  • Bank of America's (BAC - Get Report) credit card loan balances averaged $91.7 billion during the first quarter, declining from $98.3 billion in the first quarter of 2012
  • For JPMorgan Chase (JPM - Get Report), average credit card balances declined to $123.6 billion in the first quarter from $127.6 billion a year earlier
  • U.S. Bancorp (USB) reported first-quarter average credit card loans of $16.5 billion, declining from $16.8 billion a year earlier
  • Wells Fargo (WFC) reported first-quarter average credit card loans of $$24.1 billion, increasing 9% from $22.1 billion in the first quarter of 2012
  • For Citigroup (C - Get Report), average card loans increased to $146.2 billion in the first quarter from $141.7 billion in the first quarter of 2012, for a year-over-year growth rate of 3%
  • American Express (AXP) reported average loans of $62.8 billion in the first quarter, increasing 3% from $60.7 billion a year earlier
  • Capital One's (COF - Get Report) average portfolio credit card loans increased to $78.4 billion in the first quarter from $61.5 billion a year earlier, however, the company acquired roughly $27 billion in card loans from HSBC last year, and transferred its $7 billion Best Buy card portfolio to held-for-sale in the first quarter. The sale of the Best Buy portfolio to Citigroup is expected to be completed in the third quarter.

From 2013 to 2014, Orenbuch forecasts Discover will grow its revenue by 5% and its assets by 4%. For Capital One, the analyst estimates a 3% revenue decline over the same period, with assets remaining flat.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BAC $14.13 -1.60%
C $44.66 -2.00%
COF $69.68 -3.18%
DFS $55.15 -0.72%
JPM $61.57 -1.58%


Chart of I:DJI
DOW 17,651.26 -99.65 -0.56%
S&P 500 2,051.12 -12.25 -0.59%
NASDAQ 4,725.6390 -37.5850 -0.79%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs