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On Monday, TD Cowen analysts reaffirmed their Buy rating on Discover Financial (NYSE:DFS), currently trading at $162.85 with a market capitalization of $41 billion, maintaining their price target of $210.00. The stock trades at an attractive P/E ratio of 9.2, significantly below many financial sector peers. The firm’s analysis indicates a deceleration in balance growth for Discover Financial, noting a year-over-year decline of 0.7% to $99.2 billion, which is slightly below the firm’s first-quarter expectations. Despite this, the management at Discover Financial has observed improved performance in the 2023 card vintage compared to the previous year, with early indicators suggesting further improvements in the 2024 vintage. According to InvestingPro data, the company maintains a strong overall Financial Health Score of "GOOD," supported by impressive revenue growth of 33% over the last twelve months.
The monthly managed data also showed that while card loan balances decreased by $1.4 billion month-over-month, this was consistent with seasonal trends. Growth rates are currently lagging by approximately 90 to 100 basis points behind TD Cowen’s first-quarter estimate of a 0.4% year-over-year increase. Additionally, credit metrics appear to be stabilizing, with the progression of delinquencies pointing towards ongoing credit normalization.
However, credit losses are tracking higher than anticipated in the first quarter of the year. Despite this, Discover Financial’s management has indicated that the credit performance for the 2023 card vintage is surpassing that of the 2022 vintage. Moreover, early observations suggest that the 2024 vintage is also showing signs of improvement.
The commentary from TD Cowen highlights that the current focus for Discover Financial’s stock is the potential completion of the merger with Capital One Financial (COF), which has been factoring in continued high losses into its projections up to the year 2025. The outcome of this merger is seen as a significant factor for the company’s stock performance in the near term. InvestingPro analysis reveals 7 additional key investment tips and comprehensive valuation metrics for Discover Financial, available exclusively to subscribers through the detailed Pro Research Report, helping investors make more informed decisions about this significant merger.
In other recent news, Discover Financial Services reported a strong financial performance for the fourth quarter of 2024, with earnings per share (EPS) of $5.11, significantly surpassing the forecasted $3.24. The company also reported revenue of $4.76 billion, exceeding the anticipated $4.41 billion. Barclays (LON:BARC) responded to these results by raising its price target for Discover Financial from $186 to $209 while maintaining an Overweight rating, suggesting continued confidence in the company’s stock. Additionally, Discover Financial and Capital One Financial Corporation (NYSE:COF) have extended the deadline for their proposed merger to May 19, 2025, due to ongoing litigation and regulatory approval processes.
Discover Financial’s recent earnings report highlighted a 41% increase in net income year-over-year, driven by higher card receivables and net interest margins. The company also saw its 30+ day card delinquency rate improve to 3.84%, better than Barclays’ estimate of 3.94%. Keefe, Bruyette & Woods maintained an Outperform rating for Discover Financial, noting improvements in credit metrics, despite a modest year-over-year decline in end-of-period loan growth. Discover Financial’s disclosure of monthly credit card charge-off and delinquency statistics up to January 31, 2025, provided further insight into the company’s financial health.
The merger between Discover Financial and Capital One is facing legal challenges, with three lawsuits filed against the companies. Despite these hurdles, the companies are proceeding with special stockholder meetings scheduled for February 18, 2025, to vote on merger-related proposals. Discover Financial’s strategic focus on risk management and customer satisfaction continues to be a priority, as reflected in their recent performance and future plans.
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