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NEW YORK (
TheStreet) -- Some investors have been griping about the market valuation of
Discover Financial Services(DFS - Get Report), despite the stock's stellar performance, according to KBW analyst Sanjay Sakhrani.
It's not difficult to understand why. Discover's shares closed at $52.42 Monday and traded for 10.3 times the consensus 2014 earnings estimate of $5.07 a share, among analysts polled by
Thomson Reuters. That's a rather modest forward price-to-earnings ratio, considering how profitable Discover has been.
Many regional banks trade at considerably higher valuations despite being much less profitable than Discover. Here are a few examples:
Shares of Comerica(CMA) of Dallas closed at $43.30 Monday and traded for 14.7 times the consensus 2014 EPS estimate of $2.95. Comerica's return on average equity (ROE) has ranged between 6.64% and 8.49% over the past four quarters, according to Thomson Reuters Bank Insight.
First Niagara Financial Group(FNFG) of Buffalo closed at $11.06 Monday and traded for 13.5 times the consensus 2014 EPS estimate of 82 cents. The company's ROE has ranged between 4.79% and 6.42% over the past four quarters.
Shares of Zions Bancorporation of Salt Lake City closed at $28.40 Monday and traded for 15.4 times the consensus 2014 EPS estimate of $1.84. The company's ROE has ranged between 3.53% and 7.12% over the past four quarters.
Meanwhile, Discover's ROE has ranged between 22.54% and 27.78% over the past four quarters. That performance of course reflects the company's focus on credit card lending, which has been a very bright spot over the past several years, as the regional banks have worked through their nonperforming residential and commercial mortgage loans.
Discover is a unique story. The company -- originally a unit of Dean Witter when that company was held by
Sears -- not only developed its own credit card brand, in the face of entrenched competition from
American Express(AXP), but it developed its own payment network. Sears eventually spun off Dean Witter, and Dean Witter merged with
Morgan Stanley(MS) in 1997. Morgan Stanley spun-off Discover through a public offering in 2007.
Following a payments industry conference in October, Sakhrani noted that companies in many industries, including tech giants like
Facebook(FB), were making large investments in mobile payment networks. In a note to clients on Monday, the analyst wrote "Clearly, at this point, Discover's network has been viewed as the ideal partner (and perhaps the only partner) for these types of companies given: 1) the network's solid acceptance penetration in the US (at ~98% parity to [Visa and MasterCard]) and 2) its willingness to provide white label services (i.e., as it is currently doing for PayPal)."
PayPal is eBay's lucrative payments network, which partnered with Discover in April 2012 to offer merchants the ability to accept PayPal payments.