UPDATE: Burke & Quick Partners Downgrades Discover Financial Services to Market Perform, Lowers PT Following Mixed 3Q Results and Outlook

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In a report published Friday, Burke & Quick Partners analyst Michael Taiano downgraded the rating on
Discover Financial Services
DFS
from Market Outperform to Market Perform, and lowered the price target from $73.00 to $70.00. In the report, Burke & Quick Partners noted, “Discover reported 3Q14 EPS of $1.37, ahead of our estimate of $1.36 and consensus of $1.34, while revenue of $2.19B fell slightly short of our expectations. Lower than expected revenue and a higher loss provision relative to our model were more than offset by lower operating expenses and a lower tax rate that resulted in a $0.03 benefit. While y/y credit card loan growth improved to 6.6%, student loan growth and personal loan growth decelerated from previous quarters. Likewise, the NIM contracted to 9.78% from 9.84% in 2Q, and was below our 9.91% estimate as the company continues to extend duration on its debt. Perhaps most notable in the quarter was the further upward pressure on reward costs (contra-revenue) which rose to 103 bps (vs our 101 bps estimate) of purchase volume from 91 bps in 2Q and 98 bps in 3Q13. Management also expects an increase in rewards costs in 4Q as it expands its 5% cash back offer to holiday shopping categories and is projecting a full year level of 102 bps (implies 109 bps in 4Q). The company also plans on taking a charge of up to $185M ($0.26/share) to significantly reduce or eliminate its reserve for reward forfeitures, which should also cause its reward cost run rate to increase by up to 5 bps per year going forward.” Discover Financial Services closed on Thursday at $65.24.
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Posted In: Analyst ColorDowngradesAnalyst RatingsBurke & Quick PartnersMichael Taiano
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