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Investing.com -- Jefferies downgraded Discover Financial Services (NYSE:DFS) to Hold from Buy, citing the imminent close of its acquisition by Capital One (NYSE:COF) on May 18.
While acknowledging Discover’s strong first-quarter results and continued operational momentum, analysts said the stock is now “tied to the transaction specifics.”
“DFS continues to do well, as 1Q results indicate,” Jefferies wrote in a note to clients.
“Credit improved Q/Q and continues to decelerate Y/Y. NIM expansion and operational efficiency were the highlights,” wrote Jefferies.
The firm said Discover’s recent focus on simplifying operations and reducing risk has positioned the company well for integration.
However, with the deal nearing completion, the firm noted that the stock’s performance is now largely tied to Capital One.
“We D/G to HOLD given the imminent closure of the deal on May 18th,” Jefferies said. “DFS value reflects the merger bid (and thus upside is now largely tied to COF, or the combined entity).”
Jefferies raised its stand-alone earnings forecast for Discover to $14.73 for fiscal 2025, up from prior estimates, citing a first-quarter beat and strong loan growth projections.
Fiscal 2026 estimates remain unchanged at $15.91. The firm models 5.4% loan growth in 2025, stable net interest margin and operating expenses, and a 26 basis-point year-over-year improvement in net charge-offs.
Despite the downgrade, Jefferies maintained a positive long-term view, saying, “We continue to believe there is substantial upside in the combined entity.”