We are upgrading our recommendation on Discover Financial Services (DFS) to Outperform based on the forthcoming Student Loan Corp. acquisition that should enhance its already strong student loan portfolio. Moreover, third quarter earnings were substantially ahead of the Zacks Consensus Estimate.
Higher margin payment service volumes, lower loan loss provisions, higher interest yield, improvement in credit card usage with reduced defaults, and gains from the direct-to-consumer deposit business were partially offset by increased interest expenses and tax rate. Although the CARD Act regulations continued to hurt net interest margin, the company is trending upward and will be able to overcome significant losses.
Overall, the company’s extensive network, sound capital position and cost containment initiatives will help accentuate growth once the markets rebound. Our current target price is $20 per share.