On Tuesday, Deutsche Bank adjusted its stance on Discover Financial Services (NYSE:DFS), reducing the stock's price target to $136 from the previous $137, while reaffirming a Hold rating. The revision reflects an update to the earnings model and valuation for the second quarter of 2024, taking into account recent trust data from April and May. This data indicated a positive credit performance for the company, although there has been a noted slowdown in card loan growth.
The updated earnings per share (EPS) estimate for the second quarter has been increased from $2.87 to $2.99. Additionally, the full-year EPS forecasts have been raised slightly, from $11.19 to $11.25 for the fiscal year 2024, and from $12.77 to $12.90 for the fiscal year 2025. These adjustments come amidst a period where Discover has not engaged in the usual conference appearances or investor events, as it awaits the outcome of the regulatory review for its pending merger with Capital One .
Despite the positive adjustments to the EPS estimates, the price target for Discover Financial has been lowered. This is attributed to a reduction in the valuation of Capital One, which was detailed in a separate analysis published the day before. The new valuation of Capital One affects the projected takeout consideration for Discover shareholders, should the merger reach completion.
The analyst emphasized that the price target decrease from $137 to $136 is a direct result of the lower valuation assigned to Capital One. This updated valuation is considered in the context of the potential merger between Discover and Capital One, which is currently under regulatory review.
In other recent news, Discover Financial Services is garnering attention due to several recent developments. The company is expected to undergo Federal Reserve stress tests along with other significant banks. Analysts from Keefe, Bruyette & Woods anticipate a strong performance from Discover Financial, despite recent compliance issues.
Discover Financial has also been in the spotlight for its U.S. student loan portfolio, valued at approximately $10 billion, which is currently up for sale. Private equity giants Carlyle Group (NASDAQ:CG) Inc and KKR & Co are reportedly the final contenders bidding for this substantial portfolio.
Furthermore, Discover Financial Services received a neutral rating from BTIG amid prospects of a potential merger with Capital One Financial Corp (NYSE:COF). This development is closely tied to the valuation of Discover's shares, which is expected to reflect the market's anticipation of the merger's completion.
Discover's credit card receivables and credit metrics have shown positive trends, and analysts have highlighted improvements in credit quality. However, a slowdown in loan growth has raised questions about the company's ability to sustain revenue streams. Analyst firms BMO Capital and Jefferies have maintained their ratings and adjusted their price targets following the company's strong first quarter performance.
InvestingPro Insights
As Deutsche Bank updates its valuation for Discover Financial Services, investors might find additional context from the latest metrics and analyst insights. The company proudly maintains a robust dividend history, having raised its dividend for 13 consecutive years and sustained payments for 18 years. This consistency is a testament to Discover's financial stability and commitment to shareholder returns. Moreover, analysts remain optimistic about the company's profitability, forecasting positive earnings for the current year, which aligns with Discover's profitable performance over the last twelve months.
InvestingPro data further enriches this outlook, indicating a solid market capitalization of $31.72 billion and a P/E ratio of 14.41, which adjusts slightly to 13.79 when looking at the last twelve months as of Q1 2024. While revenue has seen a slight decline of 8.51% over the last twelve months, the quarterly growth is positive at 2.77%. Additionally, Discover's gross profit margin remains impressively high at 93.63%, showcasing the company's ability to maintain profitability.
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