Discover: Bank Stock Winner

NEW YORK ( TheStreet) -- Discover Financial Services ( DFS) was the winner among major U.S. banks on Monday, with shares rising 1.4% to close at $51.71.

The broad indices ended mixed as investors looked ahead to the two-day meeting of the Federal Open Market Committee, which begins Tuesday. The FOMC will release its statement on Federal Reserve policy Wednesday afternoon. Following the previous FOMC meeting in September, the committee surprised many economists and investors by deciding to make no change in the central bank's "QE3" stimulus policy, which includes net month purchases of $85 billion in long-term bonds.

The bond purchases have continued since last September. Following the partial shutdown of the federal government during the first half of October and in light of conflicting economic reports, most economists now expect the Fed to wait until 2014 to begin tapering bond the bond purchases that are meant to hold-down long-term interest rates.

Last week the Department of Labor said that the U.S. unemployment rate improved slightly to 7.2% in September from 7.3% in August. " The ongoing decline in the unemployment rate against the backdrop of moderate 2% real GDP growth is consistent with our longstanding view that potential real GDP growth has meaningfully downshifted," Deutsche Bank's equity research team wrote in a client note Monday, underscoring the likelihood of the FOMC standing pat again.

One disappointing economic report on Monday added to the likelihood of the Fed making no change this month. The National Association of Realtors said its pending home sales index fell by 5.6% in September to a reading of 101.6, from a downwardly revised 107.6 the previous month. Economists polled by Thomson Reuters on average expected the index to decline by 2% in September. The index was also down 1.2% from a year earlier.

Also on Monday, The Federal Reserve reported that U.S. industrial production rose by 0.6% during September, followed by an increase of 0.4% in August. The figure for September came in above the consensus forecast of another 0.4% increase.

The main piece of banking industry news was the announcement by the Federal Housing Finance Agency late on Friday of $5.1 billion in settlements between JPMorgan Chase, Fannie Mae and Freddie Mac. The FHFA, which regulates the two government sponsored enterprises had sued JPMorgan over losses on private label mortgage-backed securities purchased from the bank, as well as Bear Stearns and Washington Mutual.

JPMorgan acquired Bear Stearns in March 2008, as the investment firm faced a liquidity crisis that was likely to lead to bankruptcy. JPMorgan bought the failed Washington Mutual from the Federal Deposit Insurance Corp., after the nation's largest savings and loan institution was shut down by regulators in September 2008.

The FHFA settlements are part of an expected $13-billion package of settlements between JPMorgan and the Department of Justice, regulators and state attorneys general. JPMorgan didn't admit any fault in its FHFA settlement, meaning the bank avoided a potential landmine, since other institutional investors suing the company would have made good use of such an admission.

But the Justice Department is expected to insist on some admission of wrongdoing by JPM, and the phrasing of such language is delaying the overall settlement, according to media reports.

JPMorgan's shares were down 0.2% on Monday to close at $52.68.

The KBW Bank Index ( I:BKX) rose 0.2% to 64.98.


Shares of Discover Financial Services have returned 35% this year. The stock trades for 10.2 times the consensus 2014 earnings estimate of $5.07 a share, among analysts polled by Thomson Reuters. That is a low forward P/E multiple, considering the company's return on equity and the 4% year-over-year growth of its credit card loan portfolio. The consensus 2015 EPS estimate is $5.32.

The card lender on Oct. 21 reported third-quarter earnings of $593 million, or $1.20 a share, declining from $637 million, or $1.24 a share, during the third quarter of 2012. A major factor in the year-over-year decline in earnings was that the company added $42 million in loan loss reserves during the most recent quarter, compared to a reserve release of $167 million during 2012.

Discover reported a strong return on equity of 23% for the third quarter

Oppenheimer analyst Ben Chittenden rates Discover "outperform," with a 12-18 month price target of $58, and in a note to clients following the earnings release called the company his "our top pick in the credit card space."

DFS Chart DFS 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.

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