3. Discover Financial Services
Shares of Discover Financial Services (DFS) 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 data by YCharts
Interested in more on Discover Financial Services? See TheStreet Ratings' report card for this stock.
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