On Monday, UBS analyst Erika Najarian upgraded Discover Financial Services (NYSE:DFS) stock, trading on the New York Stock Exchange under the ticker NYSE:DFS, from Neutral to Buy. Alongside this upgrade, the price target was significantly increased from $150.00 to $239.00. The upgrade comes as DFS shows impressive momentum, with a 58% return over the past year and trading near its 52-week high of $188.26.
According to InvestingPro analysis, the stock appears undervalued based on its Fair Value assessment. Najarian highlighted the potential benefits arising from a recent merger, which presents Discover Financial with the opportunity to become a vertically integrated payments platform and a stronger player in the card market.
Najarian's optimism is rooted in the potential for Discover Financial to leverage its credit and debit networks to generate revenue without incurring balance sheet or credit risk. The merger is expected to provide cost-saving synergies that exceed typical bank mergers. With an impressive dividend track record spanning 18 consecutive years and a current yield of 1.65%, DFS has demonstrated strong financial discipline. According to Najarian, this strategic move could lead to a multi-year re-rating of the company's stock.
The analyst's projections for the company's financial performance are particularly bullish, with estimates for the years 2026 to 2029 surpassing the consensus. Currently trading at a P/E ratio of 12.06 and maintaining a "GOOD" financial health score according to InvestingPro, DFS shows strong fundamentals. Najarian anticipates that the combined company will achieve a return on tangible common equity (ROTCE) of 17.3% by 2026, signaling a notable improvement over the standalone profitability of Capital One Financial Corp. (NYSE: COF), which Discover Financial's performance was compared with.
The analysis by UBS suggests that Discover Financial's merger will not only enhance its profitability but also allow it to chip away at market share within the credit network space. This long-term potential is seen as a driving force for the company's stock value in the coming years.
Najarian's upgraded rating and increased price target reflect a strong conviction in Discover Financial's strategic direction and the anticipated financial outcomes of the merger. The new price target of $239.00 represents a substantial potential upside from the previous target, indicating a positive outlook for Discover Financial's investors.
In other recent news, Discover Financial has been the focus of numerous developments.
Truist Securities initiated coverage on Discover Financial with a Buy rating, highlighting the company's potential for robust return on tangible common equity growth. The firm also noted the company's successful resolution of past issues and the near completion of a student loan sale.
In terms of executive moves, the company awarded Interim CEO and President J. Michael Shepherd a one-time cash bonus of $1.5 million. Discover Financial also expedited the payout of incentives to certain executives ahead of its planned merger with Capital One Financial Corporation (NYSE:COF).
Analyst firm Keefe, Bruyette & Woods maintained its Outperform rating on Discover Financial, commenting positively on the company's recent restatement of certain expenses related to merchant liability. This restatement is part of Discover's ongoing process to gain regulatory approval for its proposed merger with Capital One Financial.
Discover Financial also reported a 41% year-over-year increase in net income for the third quarter of 2024, reaching $965 million. Finally, the company restated its previously reported financial statements for the fiscal year ended December 31, 2023, as well as for the first and second quarters of 2024.
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