This Day On The Street
Continue to site
ADVERTISEMENT
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

5 Lean and Mean Bank Stocks

3. Discover Financial Services

Shares of Discover Financial Services (DFS - Get Report) closed at $51.29 Friday, returning 34% this year.

The shares trade for 2.7 times their reported tangible book value of $19.38, and for 10.3 times the consensus 2014 EPS estimate of $4.99. The consensus 2013 EPS estimate is $4.89. That forward price-to-earnings ratio is, by far, the lowest among the five banks listed here.

Based on a quarterly payout of 20 cents, the shares have a dividend yield of 1.56%.

Discover's efficiency ratio for the 12 month period ended June 30 was 40.29%, while the company's ROA was 3.46% and its ROTCE was 26.4%, making it one of the nation's most profitable bank holding companies. The company's continued success reflects its narrow focus on credit card lending, payment services, as well as a low-cost structure for gathering deposits.

Discover has also been expanding its student lending business.

The company has continued to show solid credit card loan growth, even as U.S. consumer debt in aggregate continues to fall. Discover reported average credit card loans in August of $50.1 billion, increasing from $49.6 billion in July. That's an annualized growth rate of 12%.

During a conference presentation on Sept. 10, Discover CFO Mark Graf said there was no change in the company's outlook to be at the high end of a target annualized total loan growth rate of 2% to 5%.

Like all credit card lenders, Discover has seen credit quality improve dramatically over the past several years. The company's credit card delinquency rate was 1.6% at the end of August, and its annualized net charge-off rate for credit card loans during August was 2.0%. That's quite a low net charge-off rate when considering how profitable credit card lending is.

When asked at the conference whether credit quality could improve even more, Graf said "Yes, it could. Exactly how much, it's hard to call." He went on to say "We may have hit the plateau and we're at that point where it's hard to figure out, but we don't see anything that causes an upward turn on that in the credit profile at this point in time in the next 12 months."

By "upward turn," Graf means a sufficient decline in credit quality to cause the company to greatly increase its quarterly provision for loan losses. The provision is the amount added to reserves each quarter, which directly lowers operating revenue. Discover's second-quarter provision for loan losses was $240 million, declining from $262 million a year earlier.

In a note to clients Sept. 11, Citigroup analyst Donald Fandetti reiterated his neutral rating on Discover, with a price target of $53, writing that Graf's "positive commentary around credit should be well received by investors, as sentiment can quickly turn once card issuers begin building reserves."

DFS Chart DFS data by YCharts

Interested in more on Discover Financial Services? See TheStreet Ratings' report card for this stock.
4 of 6

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
Options Profits

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

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
BAC $17.88 -1.38%
DFS $55.81 -0.84%
PB $54.59 -0.38%
SBNY $145.59 -0.71%
WFC $57.87 -0.48%

Markets

Chart of I:DJI
DOW 17,689.86 -56.12 -0.32%
S&P 500 2,103.84 -4.79 -0.23%
NASDAQ 5,128.2810 -0.5040 -0.01%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs