Argus Upgrades Discover Financial To Buy

• Discover Financial Services DFS shares are down 18 percent year-to-date, and slipped below $55 on December 8.
• Argus Stephen Biggar upgraded the rating on the company from Hold to Buy, while maintaining a price target of $60.
• The recent decline in the company’s shares already reflect expected headwinds and higher costs, and offer an attractive entry point, Biggar stated.

Analyst Stephen Biggar believes that Discover Financial’s shares already “adequately discount” expected pressure from lower gas prices and higher promotional rewards costs. He added that the almost 20 percent decline in shares YTD offer an attractive entry point.

Biggar wrote, “While promotional rewards costs have been rising, we are encouraged by healthy new account growth, as the double rewards program for new accounts and Apple Pay have been successful.” This should enable Discover Financial to achieve card receivables growth in the range of 3-5 percent in 2016.

Since Discover Financial’s domestic credit card portfolio still accounts for 80 percent of average earning assets, international expansion represents a “significant green field” for the company. Moreover, in recent quarters, Discover Financial has performed better than most of its major card peers in terms of loan growth, credit quality, and ROA, the analyst noted.

The EPS estimate for 2016 has been reduced from $5.79 to $5.74, mostly to reflect lower gas charge volume. This is likely to be partially offset by lower credit cost assumptions, Biggar added.

“While lower charges for gas purchases remain a headwind, we expect a continued benign credit environment and a lower growth rate in compliance costs in 2016 to provide offsets. Given high single-digit projected growth in EPS for 2016, and a historical discount on forward P/E, we see an attractive entry point in the low $50s,” the Argus report stated.